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2010 Accounting Alert - PFRS For SMEs PDF
2010 Accounting Alert - PFRS For SMEs PDF
November 2010
ISBN 978-971-93586-4-0
Recommended entry:
A. Introduction 1
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
Appendices 29
To our valued clients and friends
The new Philippine Financial Reporting Standard for Small The PFRS for SMEs provides a substantially simplified
and Medium-sized Entities (PFRS for SMEs) became set of internationally recognised accounting principles
effective on January 1, 2010, with earlier application for privately held businesses. Based on the full PFRSs,
allowed. The standard was adopted by the Financial which were developed primarily for listed companies,
Reporting Standards Council (FRSC) from the the PFRS for SMEs will particularly benefit businesses
international version issued by the International that operate internationally.
Accounting Standards Board (IASB). The Securities and
Exchange Commission (SEC) has made the PFRS for Converting to new accounting principles always
SMEs a part of its rules and regulations, requiring involves some degree of financial and resource cost.
covered companies to implement the new standard Businesses and their advisers will have to learn new
starting with 2010 financial statements to be filed with terminology and accounting techniques and make
the SEC. changes to their accounting software. And there could
be other implications. Despite these challenges,
The PFRS for SMEs could transform the way privately Punongbayan & Araullo (P&A) believes the short-
held businesses in the Philippines prepare their financial term disruption will be outweighed by the longer term
statements and accounts. We believe the new standard benefits for many privately held businesses.
offers a unique opportunity to create a standardized
accounting framework for privately held businesses in We have prepared this Accounting Alert to assist you
the country, and throughout the world as enterprises in understanding and transitioning to the PFRS for
transition to the International Financial Reporting SMEs. We at P&A will be glad to provide further
Standards from which the PFRS for SMEs is adopted. assistance, if needed, in your implementation of the
standard in your respective organization.
November 2010
A.
Introduction
The Philippine Financial Reporting Standard for Small and The Philippine scenario is not different from much of
Medium-sized Entities (PFRS for SMEs) was approved by the world. In consideration of the needs of the users
the Financial Reporting Standards Council (FRSC) in of financial statements of privately held companies, as
October 2009 for implementation in the Philippines. well as the burden to preparers of those financial
The standard was adopted by the FRSC from the statements, the then Accounting Standards Council
International Financial Reporting Standard for Small and (ASC, now the FRSC) provided temporary relief to
Medium-sized Entities (IFRS for SMEs) published by the private companies — referred to as “non-publicly
International Accounting Standards Board (IASB) in accountable entities” (or NPAEs) — in October 2005
July 2009. The Preface to PFRS for SMEs issued by the by permitting entities that qualified as NPAEs not to
FRSC adopting the standard in the Philippines is use the full PFRS. The temporary relief was given
presented in Appendix A. under Philippine Accounting Standards (PAS) 101,
Financial Reporting Standards for Non-publicly Accountable
The IASB issued the IFRS for SMEs to respond to a Entities.” A copy of PAS 101 is presented in
demand. The full IFRS were developed primarily for Appendix B.
publicly-traded entities. However, there are far more
privately held companies than publicly-traded ones. PAS 101 previously permitted NPAEs to apply the
Many private companies prepare financial statements applicable financial reporting standards effective as of
but, in much of the world, these statements are based December 31, 2004, i.e., NPAEs were given the option
on local requirements that differ from the full IFRS. to apply or not to apply any new FRSC
pronouncements that became effective after
The IASB’s full IFRS were designed to meet the needs December 31, 2004.
of equity investors and other users of financial
statements in public capital markets and, therefore, Upon the adoption of the PFRS for SMEs, PAS 101
cover a wide range of issues, as well as a sizeable was withdrawn; hence it is no longer applicable in the
amount of implementation guidance and disclosures Philippines.
appropriate for public companies.
This Accounting Alert aims to provide concerned
Users of the financial statements of SMEs do not have entities with some guidance in using the PFRS for
the same needs, but are more focused on assessing SMEs, mainly by providing discussions on the
shorter-term cash flows, liquidity and solvency. In differences between the PFRS for SMEs and the full
addition, many SMEs have observed that full IFRS PFRS on one hand, and between the PFRS for SMEs
impose a burden on them, and that this burden has and PAS 101 on the other hand, as well as some issues
grown as IFRS have become more detailed and more relating to transitioning to the PFRS for SMEs.
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.
B.
The PFRS for SMEs does not itself In the abovementioned notice of foreign country’s published
deal with this question. It provides December 11, 2009, the SEC convergence plan;
instead that the decision as to which required entities that meet the
entities are required or permitted to definition of SMEs to apply the • an SME’s short-term
use the PFRS for SMEs will rest PFRS for SMEs as of the effective projections show that it will
with legislative and regulatory date (which was set for annual breach the quantitative
authorities and standard-setters in periods beginning January 1, 2010 – thresholds set in the criteria
individual jurisdictions. see Section D). This requirement has for SME, and the breach is
been clarified by the SEC to mean expected to be significant and
However, it does contain a clear that entities qualifying as SMEs continuing due to its long-
definition of the class of entity for shall use the PFRS for SMEs; such term effect on the entity’s
which the standard is intended (see entities are not allowed to use other total assets or liabilities;
definition of the term ‘small and medium- financial reporting frameworks,
sized entities’ in Section C). This such as the full PFRS, for their • an SME has concrete plans to
definition is essential so that (a) the general purpose financial conduct an initial public
IASB can decide on the accounting statements. This requirement is offering within the next two
and disclosure requirements that are somewhat restrictive, but for the years;
appropriate for that class of entity, SEC, this fulfills the goal to allow
and (b) the legislative and regulatory comparability of financial • an SME has a subsidiary that
authorities, standard-setters, statements of SMEs. is mandated to report under
reporting entities and their auditors full PFRS; and
will be informed of the intended The SEC, however, provided
scope of applicability of the exemptions from the mandatory • an SME has been preparing
standard. adoption of PFRS for SMEs to financial statements using full
SMEs that meet certain criteria. The PFRS and has decided to
The Philippine Securities and SEC notice to the public liquidate its assets.
Exchange Commission (SEC), in a issued on October 11, 2010 (see
notice to the public issued on Appendix F) provides a list of those
December 11, 2009 (see Appendix SMEs that are exempted, which
C), announced that the Commission include the following:
En Banc in its meeting on
December 3, 2009 resolved to • an SME is part of a group,
adopt the PFRS for SMEs as part either as a subsidiary, associate
of its rules and regulations. The or jointly controlled entity,
SEC Notice also included a reporting under full PFRS;
definition of ‘small and medium-
sized entities’ that includes size • an SME is a subsidiary or
criteria (see Section C). branch office of a foreign
subsidiary that will be moving
towards IFRS pursuant to the
The SEC has set the effective date capable, in terms of systems and
of PFRS for SMEs for annual resources, to efficiently transition to
periods beginning January 1, 2010. PFRS for SMEs and provided the
This effective date was later on impact of the early adoption is
revised by the SEC to allow early disclosed in the financial statements
application of the PFRS for SMEs (see related discussion under Philippine
in 2009 as long as the SMEs are SEC Implementation Guidelines in
Section J).
E.
The PFRS for SMEs defines what activities presented using As a simplification in comparison to
statements and disclosures shall be either the indirect method full PFRS, where the only changes
presented as part of a complete set (i.e., profit or loss is adjusted to equity during the periods for
of financial statements, which are for the effects of non-cash which financial statements are
the same components required transactions, any deferrals or presented arise from profit or loss,
under the full PFRS. These include accruals of past or future payment of dividends, corrections
the following: operating cash receipts or of prior period errors, and changes
payments, and items of in accounting policy, the entity may
• a statement of financial income or expenses associated present a single statement of
position as at the reporting with investing or financing income and retained earnings in
date; cash flows) or the direct place of a separate statement of
method (i.e., major classes of comprehensive income and a
• either (i) a single statement of gross cash receipts and gross statement of changes in equity.
comprehensive income or (ii) cash payments are disclosed);
a separate income statement and
and a separate statement of
comprehensive income; • notes, comprising a summary
of significant accounting
• a statement of changes in policies and other explanatory
equity for the reporting information.
period;
In general, comparative information
• a statement of cash flows for is required in respect of the
the reporting period, with the previous comparable period for all
cash flows from operating amounts presented.
Compared to the full PFRS, the PFRS for SMEs The table below provides a snapshot of how the PFRS
contains a number of simplifications. Principal among for SMEs compares with the full PFRS:
these are using simplified drafting in writing the
standard, making the final document easier to
understand and follow, and reducing the number of Full PFRS PFRS for SMEs
disclosures to be made when preparing the financial Numbered by standard Organized by topic
statements. (e.g., inventories)
The IASB has indicated that future revisions to the Around 3,000 potential Around 300 potential
IFRS for SMEs (from which the PFRS for SMEs is disclosures disclosures
adopted) will be made once every three years, providing
Around 2,800 pages in Less than 230 pages
a stable platform to both preparers and users of
length
financial statements prepared under the standard.
Updated several times Anticipated to be
The IASB also indicated that it expects to undertake a a year updated on a three-
thorough review of the SMEs’ experience in applying yearly basis
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 A snapshot of the PFRS for SMEs containing the
then propose amendments to address the section no., title and description of the various sections
implementation issues identified in that review. It will of the standard is presented in Appendix D.
also address issues arising from new and amended IFRS
that are published in the intervening period.
Basic financial • There are four categories of financial • There are two categories, i.e.,
instruments instruments. (a) amortized cost or cost less
impairment, and (b) fair value
through profit or loss.
Other financial • Hedge accounting is only possible • Rules on the use of hedge
instruments issues where strict documentation and accounting are much simplified
effectiveness requirements are met. (although more restricted).
Investments in associ- • Requires use of equity method of • Option to account for investments
ates (in consolidated FS accounting at: (a) cost; (b) under the equity
or in FS of investor that method; or (c) at fair value through
is not a parent) profit or loss (compulsory where a
quoted price is available)
Investments in joint • Option to account for investments at: • Option to account for investments
ventures (in consolidated (a) proportionate consolidation; or at: (a) cost; (b) under the equity
FS or in FS of investor (b) under the equity method method; or (c) at fair value through
that is not a parent) profit or loss (compulsory where a
quoted price is available)
• No proportionate consolidation
option
Investment property • Option to measure asset at: (a) cost- • Must be accounted for at fair value if
depreciation-impairment model; or such a value is available without
(b) fair value model undue cost or effort. Cost model
should be used only when fair value
is not available.
Property, plant and • Option to measure asset at: (a) the • Requires use of the cost-
equipment cost model; or (b) revaluation model depreciation-impairment model
• No revaluation option
Intangible assets other • Development costs are capitalized • Expenditures incurred internally on
than goodwill where the six specific criteria are intangible item, including all
met. research and development costs,
are expensed.
• Intangible asset with infinite life is • All intangible assets are considered
not amortized but impairment testing to have a finite life, hence, are
is required annually, and whenever amortized. If there is no reliable
indicator of impairment exists. estimate of useful life, presumed life
is ten years.
Borrowing costs • Borrowing costs directly attributable • All borrowing costs are expensed.
to acquisition, construction or
production of a qualifying asset are
capitalized.
Share-based payment • In case market prices are not • A simplified guidance (i.e., a three-
available, fair value of shares and tier measurement hierarchy) for
share options is estimated using a measuring the fair value of share
valuation technique that options and other form of share-
incorporates all relevant factors and based payment is provided.
assumptions. Detailed guidance on
many valuation issues is provided.
Post-employment • Actuarial gains and losses are not • The corridor approach for
defined benefit plans recognized as an income or expense recognizing actuarial gains and
unless unrecognized gain or loss losses is not permitted. Any change
exceeds 10% of the greater of the in the defined benefit liability is
defined benefit obligation and fair recognized as the cost of the
value of plan assets. The amount defined benefit plan for the period.
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.
As mentioned in Section A earlier, Those NPAEs that now qualify as The issues listed below are by no
PAS 101 previously permitted SMEs under the PFRS for SMEs means exhaustive and, therefore,
NPAEs to apply the applicable are required to apply the PFRS for reference should be made to the
financial reporting standards SMEs, except for those entities text of the relevant standards for a
effective as of December 31, 2004, exempted by the SEC from the proper understanding of those
i.e., NPAEs were given the option mandatory adoption of the PFRS issues.
to apply or not to apply any new for SMEs (see discussion in Section B
FRSC pronouncements that became and Appendix F). • Size criteria – The size
effective after December 31, 2004. criteria for NPAEs (as the
For the guidance of NPAEs that term is used and defined
Having been given such an option: previously used PAS 101, we under PAS 101) were pegged
present below some of the major at a single amount for total
• some NPAEs adopted the differences between PAS 101 and assets (P250 million) and total
pronouncements effective as the PFRS for SMEs. (For NPAEs liabilities (P150 million); there
of December 31, 2004 but did that previously used the full PFRS was no ceiling or floor similar
not adopt any new and are now required to use the to that provided for SMEs (as
pronouncements made PFRS for SMEs, the discussions in the term is defined and used
effective after December 31, Section G above will be relevant.) under the PFRS for SMEs).
2004;
The size criteria for SMEs
• other NPAEs adopted the include a floor (P3 million for
pronouncements effective as both total assets and total
of December 31, 2004 and liabilities) and a ceiling (P350
applied some new standards million for total assets and
made effective after P250 million for total
December 31, 2004; while liabilities).
Section 34 of the PFRS for SMEs In relation to agricultural activity, The pronouncements effective as
deals with the following specialized the PFRS for SMEs requires fair of December 31, 2004 applied by
activities: value to be used for biological most NPAEs did not include
assets where fair value is readily standards that deal with the above
a. agriculture determinable without undue cost or specialized activities.
effort. All other biological assets are
b. extractive activities accounted for at cost.
c. service concession
arrangements
J.
The PFRS for SMEs includes some c. Basis for Conclusion – e. Presentation and
other sections: provides the discussions and Disclosure Checklist –
various considerations made summarizes the presentation
a. Glossary of Terms – in coming out with the and disclosure requirements
provides the definition of conclusions adopted in the throughout the PFRS for
certain terms used in the PFRS for SMEs SMEs
PFRS for SMEs
d. Illustrative Financial
b. Derivation Table – identifies Statements – includes a
the primary sources in full complete set of illustrative
PFRS from which the financial statements prepared
principles in each section of in accordance with the PFRS
the PFRS for SMEs were for SMEs to illustrate major
derived aspects of the standard
• Management reporting
processes may need to be
reviewed.
Tax
1. The Financial Reporting Standards Council (FRSC) 4. In the Philippines, the PFRS for SMEs shall be used
approved on 13 October 2009, the adoption of by entities that meet the definition of an SME as set
International Financial Reporting Standard for Small forth in the Securities and Exchange Commission
and Medium-sized Entities (IFRS for SMEs) issued (SEC) En Banc Resolution dated 13 August 2009.
by the International Accounting Standards Board The SEC defines an SME for financial reporting
(IASB), as Philippine Financial Reporting Standard only as an entity:
for Small and Medium-sized Entities (PFRS for
SMEs). a. With total assets between P3 Million and P350
Million or total liabilities of between P3 Million
Scope of PFRS for SMEs and P250 Million;
2. The IASB describes SMEs as entities that (a) do not
have public accountability, and (b) do not publish b. That is not required to file financial statements
general purpose financial statements for external under SRC Rule 68.1;
users. (See Section 1 of the PFRS for SMEs.) An
entity has public accountability if: c. That is not in the process of filing its financial
statements for the purpose of issuing any class
a. its debt or equity instruments are traded in a of instruments in a public market;
public market or it is in the process of issuing
such instruments for trading in a public market d. That is not a holder of a secondary license
(a domestic or foreign stock exchange or an issued by a regulatory agency, such as a bank (all
over-the-counter market, including local and types of banks), an investment house, a finance
regional markets), company, an insurance company, a securities
broker/dealer, a mutual fund and a pre-need
b. it holds assets in a fiduciary capacity for a broad company; and
group of outsiders as one of its primary
businesses. This is typically the case for banks, e. That is not a public utility.
credit unions, insurance companies, securities
brokers/dealers, mutual funds and investment
banks.
FRSC Members
*
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.
Financial Repor
Repor ting Standards for Non-publicly Accountable Entities
eporting
Contents Paragraphs
Introduction 1-5
Objective 6
Disclosure 15
Effective date 16
Appendix
Financial reporting standards effective as of December 2004
applicable to qualifying entities
Introduction
1. The Accounting Standard Council (ASC), in line with 4. Under the IASB project, an entity has public
the accounting profession’s objective to converge accountability if:
Philippine accounting standards with international
accounting standards, issued a number of new • it has filed, or it is in the process of filing, its
accounting standards, referred to as Philippine financial statements with a securities commission
Financial Reporting Standards (PFRSs) that became or other regulatory organization for the purpose
effective in 2005. The adoption of the new accounting of issuing any class of instruments in a public
standards was approved by the Securities and Exchange market;
Commission (SEC), the Board of Accountancy (BOA)
and Professional Regulation Commission (PRC); and • it holds assets in a fiduciary capacity for a broad
the Bangko Sentral ng Pilipinas (BSP). The PFRSs group of outsiders, such as a bank, insurance
were intended at that time to be applicable to all company, securities broker/dealer, pension fund,
reporting entities that prepared financial statements mutual fund or investment banking entity;
in conformity with generally accepted accounting
principles in the Philippines. • it is a public utility or similar entity that provides
an essential public service; or
2. Considering the significant number of small and
medium-sized entities (SMEs) in the Philippines, the • it is economically significant in its home country
ASC has considered providing a temporary relief to on the basis of criteria such as total assets, total
SMEs in the application of the new standards. income, number of employees, degree of market
dominance, and nature and extent of external
3. The ASC plan was given impetus by the decision of borrowings.
the International Accounting Standards Board (IASB)
in 2005 to undertake a project to develop accounting 5. The IASB expects to issue an exposure draft on
standards suitable for entities that (1) do not have accounting by NPAEs in March 2006 and the final
public accountability and (2) publish general purpose standard in 2007.
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-Publicly
Accountable 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.
*
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.
SFAS 13 (rev) Net Profit or Loss for the Period, Fundamental Errors and Changes in Accounting
Policies
SFAS 28 Revenue
SFAS 20/IAS 20 Accounting for Government Grants and Disclosure of Government Assistance
SFAS 27/IAS 27 Consolidated Financial Statements and Accounting for Investments in Subsidiaries
ASC Members
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:
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.
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.
FE B. BARIN
Chairperson
Section No
No.. Title Description
1 Small and Medium-sized Defined as entities that (a) do not have public
Entities (SMEs) accountability, and (b) publish general purpose financial
statements for external users.
2 Concepts and Pervasive Major concepts and basic principles underlying the
Principles financial statements of SMEs, such as definitions of
assets, liabilities, income and expenses.
6 Statement of Changes in Equity Changes in an entity’s equity for a period are presented
and Statement of Income and either in a statement of changes in equity or, if certain
Retained Earnings conditions are met and an entity chooses, in a statement
of income and retained earnings.
7 Statement of Cash Flows Changes in cash and cash equivalents are reported,
showing separately changes from operating activities,
investing activities and financing activities.
10 Accounting Policies, Estimates Prior period errors are accounted for on a retrospective
and Errors basis.
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 Other financial instruments are generally measured at fair
Issues value through profit or loss. Examples of such
instruments include asset backed securities, options,
futures contracts, forward contracts, and interest rate
swaps.
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 All internally developed intangibles, including all research
Goodwill and development activities, are expensed as incurred.
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.
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.
32 Events after the End of the Adjustment is made for events that provide evidence of
Reporting Period conditions that existed at the end of the reporting period.
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.
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):
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”
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.)
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.
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. Date 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.
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. Date 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).
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.
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.
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).
FE B. BARIN
Chairperson
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;
7. It has concrete plans to conduct an initial public offering within the next two (2) years;
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.
Fe B. Barin
Chairperson
Davao
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Joy G. Politico
Politico
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E Joy.Politico@ph.gt.com