2010 Accounting Alert - PFRS for SMEs

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Accounting AlertPhilippine 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.

No part of this work covered by the copyright hereon may be reproduced and/or used in any

form or by any means–graphic, electronic or mechanical–without the written permission of the

publisher.

ISBN 978-971-93586-4-0

Published by Punongbayan & Araullo

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1200 Makati City, Philippines

Cover design by Punongbayan & Araullo

Printed in the Philippines by AAP Printers

Recommended entry:

Punongbayan & Araullo

Accounting Alert

Philippine Financial Reporting Standard for Small and Medium-sized Entities

by Punongbayan & Araullo–First Edition–Makati City

Copyright © 2010 by Punongbayan & Araullo

ContentsContentsContentsContentsContents PPPPPagesagesagesagesages

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 SME’s 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 IASB’s 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.

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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 country’s published

convergence plan;

• an SME’s 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 entity’s

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

SMEsSMEsSMEsSMEsSMEs

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 AlerAccounting AlerAccounting AlerAccounting AlerAccounting Alert: PFRS for SMEst: PFRS for SMEst: PFRS for SMEst: PFRS for SMEst: PFRS for SMEs 33333

‘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 SECPhilippine SECPhilippine SECPhilippine SECPhilippine 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 SME’sfinancial 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 FRSC’s 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 andmeasurement principles under PFRS forSMEs?


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 divergefrom 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.

FFFFFull PFRSull PFRSull PFRSull PFRSull PFRS PFRS for SMEsPFRS for SMEsPFRS for SMEsPFRS for SMEsPFRS 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


TTTTTopics omittedopics omittedopics omittedopics omittedopics 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 ofDifferences in specific areas ofDifferences in specific areas ofDifferences in specific areas ofDifferences in specific areas of

recognition and measurementrecognition and measurementrecognition and measurementrecognition and measurementrecognition and measurement

guidanceguidanceguidanceguidanceguidance

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

preparer’s 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 entity’s 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 39’s

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.

InInInInInvvvvvestments in associaestments in associaestments in associaestments in associaestments in associatestestestestes

(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

investor’s 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.

InInInInInvvvvvestments in joint vestments in joint vestments in joint vestments in joint vestments in joint venturenturenturenturentureseseseses

(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.)

InInInInInvvvvvestment prestment prestment prestment prestment properoperoperoperopertytytytyty

(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.



PrPrPrPrProperoperoperoperopertytytytyty,,,,, 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 thanIntangible assets other thanIntangible assets other thanIntangible assets other thanIntangible assets other than

gggggoodoodoodoodoodwill 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 combinaBusiness combinaBusiness combinaBusiness combinaBusiness combinations andtions andtions andtions andtions and

gggggoodoodoodoodoodwill 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

acquiree’s 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

acquirer’s 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

acquirer’s 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 acquiree’s

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.

BorBorBorBorBorrrrrrooooowing 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.

SharSharSharSharShare-based pae-based pae-based pae-based pae-based paymentymentymentymentyment

(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 SME’s 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.


SummarSummarSummarSummarSummary of main areas of differences in recognition and measurement guidancey of main areas of differences in recognition and measurement guidancey of main areas of differences in recognition and measurement guidancey of main areas of differences in recognition and measurement guidancey 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:

SubjectSubjectSubjectSubjectSubject FFFFFull PFRSull PFRSull PFRSull PFRSull PFRS PFRS for SMEsPFRS for SMEsPFRS for SMEsPFRS for SMEsPFRS 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 fromPAS 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 inthe 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 PFRSfor 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 retrospectiveAreas where retrospectiveAreas where retrospectiveAreas where retrospectiveAreas where retrospective

application is prohibitedapplication is prohibitedapplication is prohibitedapplication is prohibitedapplication 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 exemptionsOptional exemptionsOptional exemptionsOptional exemptionsOptional 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-timeDisclosure on first-timeDisclosure on first-timeDisclosure on first-timeDisclosure on first-time

adoptionadoptionadoptionadoptionadoption

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 implementationPhilippine SEC implementationPhilippine SEC implementationPhilippine SEC implementationPhilippine SEC implementation

guidelinesguidelinesguidelinesguidelinesguidelines

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 thePFRS 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 SEC’s 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 forChallenges of adopting PFRS forChallenges of adopting PFRS forChallenges of adopting PFRS forChallenges of adopting PFRS for

SMEsSMEsSMEsSMEsSMEs

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.


PPPPPotential areas of impactotential areas of impactotential areas of impactotential areas of impactotential 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 Españo, Managing Partner & COO

[email protected]

Jun Cuaresma, Head - Audit & Assurance Division

[email protected]

Dally Duque, Head - Audit Technical Group

[email protected]

Mabel Comedia, Partner - Audit Technical Group

[email protected]

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.


AppendicesAppendicesAppendicesAppendicesAppendices PPPPPagesagesagesagesages

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 Standardfor 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 SMEsScope of PFRS for SMEsScope of PFRS for SMEsScope of PFRS for SMEsScope 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 TEffective Date and TEffective Date and TEffective Date and TEffective Date and Transitionransitionransitionransitionransition

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).

WWWWWithdrawal of Pithdrawal of Pithdrawal of Pithdrawal of Pithdrawal of PAS 101AS 101AS 101AS 101AS 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 MembersFRSC MembersFRSC MembersFRSC MembersFRSC 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

FFFFFinancial Rinancial Rinancial Rinancial Rinancial Reporeporeporeporeporting Standards for Non-publicly Accountable Entitiesting Standards for Non-publicly Accountable Entitiesting Standards for Non-publicly Accountable Entitiesting Standards for Non-publicly Accountable Entitiesting Standards for Non-publicly Accountable Entities

ContentsContentsContentsContentsContents PPPPParagraphsaragraphsaragraphsaragraphsaragraphs

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



IntroductionIntroductionIntroductionIntroductionIntroduction

1. The Accounting Standard Council (ASC), in line with

the accounting profession’s 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-PubliclyAccountable 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 101Financial 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

issuer’s 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

insurance company, a

securities broker/dealer, a

mutual fund and a pre-need

company;

d. if it is a public utility or similar

entity that provides an

essential public service;

e. if it is economically significant,

as described in paragraph 8; or

f. if it is considered by its

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 entity’s 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.

ObjectiveObjectiveObjectiveObjectiveObjective

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

which 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 AOption AOption AOption AOption Available to Qualifvailable to Qualifvailable to Qualifvailable to Qualifvailable to Qualifyingyingyingyingying

EntitiesEntitiesEntitiesEntitiesEntities

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.

FFFFFinancial Rinancial Rinancial Rinancial Rinancial Reporeporeporeporeporting Standardsting Standardsting Standardsting Standardsting Standards

Applicable to QualifApplicable to QualifApplicable to QualifApplicable to QualifApplicable to Qualifying Entitiesying Entitiesying Entitiesying Entitiesying 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.

DisclosureDisclosureDisclosureDisclosureDisclosure

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 DateEffective DateEffective DateEffective DateEffective 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.∗

AppendixAppendixAppendixAppendixAppendix

Financial Reporting Standards

Effective as of December 2004

Applicable to Qualifying NPAEs under PAS 101


FFFFFramework for the Pramework for the Pramework for the Pramework for the Pramework for the Preparation and Preparation and Preparation and Preparation and Preparation and Presentation of Fresentation of Fresentation of Fresentation of Fresentation of Financial Statementsinancial Statementsinancial Statementsinancial Statementsinancial 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 PApproval of PApproval of PApproval of PApproval of PAS 101 by the ASCAS 101 by the ASCAS 101 by the ASCAS 101 by the ASCAS 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 MembersASC MembersASC MembersASC MembersASC 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 COMMISSIONSECURITIES AND EXCHANGE COMMISSIONSECURITIES AND EXCHANGE COMMISSIONSECURITIES AND EXCHANGE COMMISSIONSECURITIES 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 11th day of December 2009, Mandaluyong City, Philippines.

For the Commission:

FE B. BARIN

Chairperson

Snapshot of the PFRS for SMEs

Appendix D


Section NoSection NoSection NoSection NoSection No..... TTTTTitleitleitleitleitle DescriptionDescriptionDescriptionDescriptionDescription

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 entity’s 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 entity’s 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 investor’s

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 plan’s 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. TTTTTransition from full PFRS to PFRS for SMEsransition from full PFRS to PFRS for SMEsransition from full PFRS to PFRS for SMEsransition from full PFRS to PFRS for SMEsransition 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. TTTTTransition of NPransition of NPransition of NPransition of NPransition of NPAEs from PAEs from PAEs from PAEs from PAEs from PAS 101 to PFRS to SMEs onlyAS 101 to PFRS to SMEs onlyAS 101 to PFRS to SMEs onlyAS 101 to PFRS to SMEs onlyAS 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. TTTTTransition of NPransition of NPransition of NPransition of NPransition of NPAEs from PAEs from PAEs from PAEs from PAEs from PAS 101 to full PFRSAS 101 to full PFRSAS 101 to full PFRSAS 101 to full PFRSAS 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. FFFFFinancial Rinancial Rinancial Rinancial Rinancial Reporeporeporeporeporting Fting Fting Fting Fting Framework of Entities now covered by either the full PFRS or PFRS for SMEsramework of Entities now covered by either the full PFRS or PFRS for SMEsramework of Entities now covered by either the full PFRS or PFRS for SMEsramework of Entities now covered by either the full PFRS or PFRS for SMEsramework 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 SMEsDate for applying the size criteria and for transitioning to full PFRS or to PFRS for SMEsDate for applying the size criteria and for transitioning to full PFRS or to PFRS for SMEsDate for applying the size criteria and for transitioning to full PFRS or to PFRS for SMEsDate 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 entity’s 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

entity’s 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 entity’s 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 Management’s

Responsibility and Auditor’s 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 management’s 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 earlyDate for applying the size criteria if the PFRS for SMEs is adopted earlyDate for applying the size criteria if the PFRS for SMEs is adopted earlyDate for applying the size criteria if the PFRS for SMEs is adopted earlyDate 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 entity’s 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 PFRSSubsidiaries of a parent company that use full PFRSSubsidiaries of a parent company that use full PFRSSubsidiaries of a parent company that use full PFRSSubsidiaries 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. RRRRRequired disclosuresequired disclosuresequired disclosuresequired disclosuresequired disclosures

If an SME’s 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 SMEsEarly adoption of PFRS for SMEsEarly adoption of PFRS for SMEsEarly adoption of PFRS for SMEsEarly 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 9th 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 country’s 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

country’s 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 company’s

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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central business district of Makati

City, with branches in three other

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a list of our offices, together with

the primary contact persons.

MakatiMakatiMakatiMakatiMakati

20th Floor, Tower 1, The Enterprise Center

6766 Ayala Avenue, Makati City

T +63 2 886-5511

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W www.punongbayan-araullo.com

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Managing Partner & COO

T +63 2 886-5579

E [email protected]

Leonardo D. Cuaresma JrLeonardo D. Cuaresma JrLeonardo D. Cuaresma JrLeonardo D. Cuaresma JrLeonardo D. Cuaresma Jr.....

Head, Audit & Assurance

T +63 2 887-9405

E [email protected]

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Head, Advisory Services

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E [email protected]

Eleanor L. REleanor L. REleanor L. REleanor L. REleanor L. Roqueoqueoqueoqueoque

Head, Tax Advisory & Compliance

T +63 2 887-9457

E [email protected]

Jessie C. CarpioJessie C. CarpioJessie C. CarpioJessie C. CarpioJessie C. Carpio

Head, Finance & Accounting Outsourcing

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E [email protected]

CaviteCaviteCaviteCaviteCavite

2nd Floor, Unit E

12B Gen. Emilio Aguinaldo Highway

Sampaloc 1, Pala-Pala

Dasmariñas, Cavite

Philippines

T +63 46 416-2935; +63 46 416-4884

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Nelson J. DinioNelson J. DinioNelson J. DinioNelson J. DinioNelson J. Dinio

Partner-in-charge

T +63 2 887-9476

F +63 2 886-5506

E [email protected]

CebuCebuCebuCebuCebu

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

RRRRRamilito L. Nañolaamilito L. Nañolaamilito L. Nañolaamilito L. Nañolaamilito L. Nañola

Partner-in-charge

T +63 2 887-9497

F +63 2 886-5506

E [email protected]

WWWWWendell D. Ganhinhinendell D. Ganhinhinendell D. Ganhinhinendell D. Ganhinhinendell D. Ganhinhin

Director, Cebu Branch

T +63 32 231-6090; 233-0577; 234-1540

F +63 32 231-0693

E [email protected]

DavaoDavaoDavaoDavaoDavao

Units 46 and 47, 4th Floor

The Landco - PDCP Corporate Centre

J.P. Laurel Avenue, Davao City 8000

Philippines

T +63 82 221-1498 to 99; 221-1500

F +63 82 221-1498

RRRRRamilito L. Nañolaamilito L. Nañolaamilito L. Nañolaamilito L. Nañolaamilito L. Nañola

Partner-in-charge

T +63 2 887-9497

F +63 2 886-5506

E [email protected]

Joy G. PJoy G. PJoy G. PJoy G. PJoy G. Politicooliticooliticooliticoolitico

Senior Manager

T +63 82 221-1498 to 99;

+63 82 221-1500

F +63 82 221-1498

E [email protected]

Documents

2010 Accounting Alert - PFRS for SMEs