PFRS for SMEs

Mr. Eric Magcale, Resource Speaker

31August-1September 2018

➢ SRC Rule 68, (as amended)

SME: are those that meet ALL of the following criteria:
1. Total asset: 3M to 350M or total liabilities of 3M to 250M
2. Are not required to file financial statements under Part II of SRC Rule 68
3. Are not in process of filing their financial statements for the purpose of issuing any class of
instruments in a public market
4. Are not holders of secondary licenses issued by regulatory agencies

➢ Optional Exemptions: SRC Rule

SMEs shall use as their financial reporting framework the Philippine Financial Reporting Standards for
SMEs (“PFRS for SMEs”) as adopted by the Commission. However, the following SMEs shall be
exempt from the mandatory adoption of the PFRS for SMEs and may instead apply, at their
option, the PFRS:
(1) An SME which is a subsidiary of a parent company reporting under the PFRS;
(2) An SME which is a subsidiary of a foreign parent company which will be moving towards
International Financial Reporting Standards (“IFRS”) pursuant to the foreign country’s published
convergence plan;
(3) An SME which is a subsidiary of a foreign parent company and has been applying the standards
for a non-publicly accountable entity for local reporting purposes. It is considering moving to PFRS
instead 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) An SME, either as a significant joint venture or associate, is part of a group that is reporting under
the PFRS;
(5) An SME which is a branch office or regional operating headquarter of a foreign company reporting
under the IFRS;
(6) An SME which has a subsidiary that is mandated to report under the PFRS;
(7) An SME which has a short term projection that show that it will breach the quantitative
thresholds set in the criteria for an SME. The breach is expected to be significant and continuing
due to its long-term effect on the company’s asset or liability size;
(8) An SME which has a concrete plan to conduct an initial public offering within the next two (2)
years;
(9) An SME which has been preparing financial statements using PFRS and has decided to liquidate;
(10) Such other cases that the Commission may consider as valid exceptions from the mandatory
adoption of PFRS for SMEs.
- before adopting above item#10, one should specifically done in writing to SEC for approval and
must have the SEC approval, otherwise it shall be a violation to SRC Rule 68.

• Topics not relevant to SMEs: (applicable only to listed

1. Earnings for share
2. Interim financial reporting
 3. Segment reporting
4. Asset held for sale
- For SMEs, when assets are considered ‘held for sale’, it shall remain on its original classification
and not be re-classified as a separate account as “Non-current Assets Held for Sale” as with Full
PFRS practice.

• Section 1: SME, as
✓ Not publicly accountable
- Publicly accountable: (a) with debt/equity instrument for trading publicly, (b) holds assets in
fiduciary capacity
✓ Those publish general purpose financial statements for external users

• Section 2: Concepts and Pervasive Principles (Conceptual Framework)

- In cases of unclear or no applicable existing standards, this section provides guide
✓ What Changed? Addition of clarifying guidance on the undue cost or effort exemption used
throughout the PFRS for SMEs
• Section 3: Financial Statement Presentation

• Section 4: What Changed?

✓ Inclusion of Investment Property as minimum line item in the face of FS
✓ Disclosure of the reconciliation of the opening and closing number of shares outstanding for
prior period is not required

• Section 5: Statement of Comprehensive Income and Income Statement

• Section 6: Statement of Changes in Equity

• Section 7: Statement of Cash Flows

➢ Operating Activities:
✓ Direct method or indirect method
➢ Investing and Financing Activities:
✓ Direct method only

• Section 8: Notes to Financial Statements

➢ Disclosure on the basis of preparation and specific accounting policies
➢ Notes be presented in systematic manner
➢ Statement of compliance with PFRS for SMEs
➢ Summary of Significant Accounting Policies
- Measurement basis
- Relevant accounting policies

• Section 9: Consolidation and Separate Financial Statements

➢ Shall include all subsidiaries
- Creation of holding company is well-planned, acceptable tax avoidance mechanism
• Section 10: Accounting Policies, Estimates and Errors
➢ Disclosures of the (a) nature, (b) Reasons, (c) Effects, (d) amount

• Section 11: Basic Financial Instruments

➢ Accounting Policy choice:
✓ Requirements of section 11 & 12, or
✓ Recognition and measurement of PFRS 9 (superseded PAS 39), disclosure is still to use section
11 & 12
➢ Financial Instruments:
✓ It must be covered by contractual provisions of the instrument, initially measured at
transaction price

• Section 12: Other Financial Instruments Issues

• Section 13: Inventories

• Section 14: Investments in Associates

✓ Entity over which the investor has significant influence that is neither subsidiary nor joint
venture

• Section 15: Investment in Joint Ventures

✓ Contractual arrangement whereby two or more parties undertake an economic activity that is
subject to joint control

• Section 16: Investment Property

✓ Property held by owner or by lessee under finance lease to earn rentals or for capital
appreciation or both
✓ Initial measurement: at cost
✓ Subsequent measurement: Fair Value at each Reporting Period with changes recognized in P&L
✓ Disclosure: basis for valuation

• Section 17: Property, Plant & Equipment

✓ Held for use in the production or supply of goods, services, for rental to others, of for
administrative purposes
✓ Expected to be used for more than one period

• Section 18: Intangibles other than Goodwill

✓ Unidentifiable non-monetary asset without physical substance
- Almost same treatment as PPE, only that there is no physical asset
✓ Recognition: (1) Probability of future economic benefits
(2) Measurement reliability of cost
(3) No recognition of internally-generated intangible assets
- Internally-developed/generated intangibles are not capitalized
 - Research costs are expensed as incurred
- Development cost can only be capitalized after determination of commercial viability (full PFRS);
for PFRS for SMEs, ALL R&D costs are expense as incurred
- Borrowing costs related to Qualifying Assets can be capitalized under full PFRS, under PFRS for
SMEs, ALL borrowing cost are expensed as incurred
- Organization or Start-up costs are ALL expensed as incurred
✓ Under PFRS for SME, maximum life of intangible is only 10 years; for full PRFS, unlimited life
➢ Goodwill
✓ Not amortized, tested annually for impairment

• Section 19: Business Combination and Goodwill

➢ Purchase method (full PFRS), Pooling of interest can still be used under PFRS for SMEs
➢ Goodwill: excess of cost of the business over acquirer’s interest on the net FV of the identifiable
assets, liabilities and contingent liabilities recognized
➢ Negative Goodwill: (1) reassess accounting for business combination
(2) recognize excess in P&L

• Section 20: Leases

➢ Classification: (similar to PAS 17)
✓ Measure finance lease at lower of FV of interest in leased property and present value of
minimum lease payment
A. Finance Lease: if it transfers substantially all the risks and rewards incidental to
ownership
✓ Criteria: any
1. Ownership is transferred at the end of lease term
2. Lease contract provides Bargain Purchase Option: option to buy the asset
3. Useful life of asset is substantially covered by the lease term (US GAAP: 75% rule)
4. Present value of the total lease payments is almost equal to FV of the asset (US GAAP:
90% rule
5. Exclusive use of Lessee even after lease term
✓ Other criteria
- When cancellation of lease term is conditioned upon occurrence which is very remote
to happen
- Cancellation of contract is borne by lease, onerous on the side of the leases
❖ Lessee: finance lease
✓ Recognize lease asset in its books: lower of FV of leased property and present value of
minimum lease payment plus initial direct cost
✓ Amortization of lease liability using effective interest method
✓ Recognize depreciation shorter of lease term and asset useful life
❖ Lessor
B. Operating Lease: if not finance lease
✓ PAS 17 requires straight-line recognition
❖ Sale and leaseback transactions
➢ Finance Lease: defer and amortize any gain or loss on the sale
 ➢ Operating Lease: if sale is at FMV, recognize immediately
If sale is below FMV, recognize immediately; unless loss is compensated
for by future lease payments: defer and amortize

• Section 21: Provision and contingencies

❖ Recognition: Accrue an obligation arising from past event is amount can be estimated reliably,
which will require outflow of economic resource
➢ Contingent Liability: no accrual, just disclose
❖ Initial measurement: large population- use weighted average, single obligation- use the most
likely outcome
❖ Subsequent measurement: any adjustment reflecting the current best estimate to P&L
✓ Not required to disclose comparative information

• Section 22: Liabilities and Equity

❖ Stock dividends
✓ Reclassify amount within equity as required by applicable laws
✓ Do not change total equity

• Section 23: Revenue

- Recognizing ‘Contract Assets’ in cases of sale of services which includes good for free (considered
sale of goods)
❖ Sale of Goods
1. Transfer of ownership: risk and rewards
2. Effective control on the goods or managerial involvement
3. Revenue can be measured reliably
4. Probable economic benefits
5. Cost can be measured reliably
❖ Sale of Services
➢ Percentage of completion or Cost recovery method

• Section 24: Government Grants

• Section 25: Borrowing Cost

• Section 26: Share-based Payment

• Section 27: Impairment of assets

✓ When Carrying amount is less than Recoverable amount
- Perfect time identify do write-down is when doing the annual physical inventory count
❖ Indicators of impairment
1. Significant decline in the assets market value
2. Technological, market, economic, or legal environment changes with adverse effect on the
entity
3. Obsolescence or physical damage
• Section 28: Employee Benefits
✓ Short-term benefits measured at undiscounted amount expected to be paid
RA7641: Retirement Law

• Section 29: Income Tax

❖ Current Tax
❖ Deferred Tax: expense in P&L but not really deductible from revenue for tax purposes
Revenue in P&L but not really addition to revenue for tax purposes

• Section 30: Foreign Currency Translation

➢ Monetary items: translated using closing rate
➢ Non-monetary items measured at historical cost: translated using exchange rate at the date of
transactions
➢ Non-monetary items measured at Fair Value: translated using exchange rate as date when FV
was determined

• Section 32: Events after the Reporting Period

➢ Types: (1) Adjusting events: adjust
(2) Non-adjusting events: disclosures only

• Section 33: Related Party Disclosures

Related parties are those having:
✓ Common Key Management personnel
✓ Common Parent entity

• Section 34: Specialized Activities

❖ Agriculture: (1) Fair Value model – measure at FV if readily determinable without undue cost or
effort
(2) Cost Model- all other biological assets
❖ Extractive Activities- accounted using section 17 for PPE, section 18 for intangibles
❖ Service Concession Arrangement: (1) Financial Asset model
(2) Intangible Asset model

• Section 35: Transition to the PFRS for SMEs

✓ Option to permit transitions more than once, previously can be adopted only once, no reverting
back to it