CHAPTER U
BLUE NOTES
Small AND
Medium-sized
ENTITIES
INTRODUCTION
Small and Medium-Sized Entities
SMEs Definition
(IASB)
Do not have public accountability and Publish general
purpose financial statements for external users.
SMEs Definition
(Philippine SEC)
With total assets between P3,000,000 and P350,000,000 OR
with total liabilities between P3,000,000 and P250,000,000.
That is NOT required to file financial statements under SRC rule
68.1
SRC Rule 68.1
This pertains to listed entities or entities whose securities are
traded in an exchange market, and entities with assets of at
least P50,000,000 and have 200 or more holders each holding at
least 100 shares of a class of equity securities.
That is not in the process of filing financial statements for the
purpose of issuing any class of instruments in a public market.
That is not a holder of secondary license issued by a regulatory
agency such as a bank (all types of banks), an investment house,
a finance company, an insurance company, securities broker or
dealer, a mutual fund and pre-need company.
That is not a public utility.
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58 S
L
SMEs Exempt from Mandatory Adoption of
PFRS for SMEs
1. It is a subsidiary of a parent reporting under full PFRS.
2. It is a subsidiary of a foreign parent that will be moving
toward full IFRS pursuant to the foreign country’s
published convergence plan.
3. It is a subsidiary of a foreign parent that has been
applying standards for a nonpublicly accountable entity
for local reporting purposed, and is considering moving
to full PFRS instead of the PFRS for SMEs in order to
align its policies with the expected move to full IFRS by
its foreign parent pursuant to the foreign country’s
published convergence plan.
4. It has a 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
entity’s asset or liability.
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 entity reporting under
full IFRS.
7. It has concrete plans to conduct an initial public
offering within the next two years.
8. It has a subsidiary that is mandated to report under full
PFRS.
9. It has been preparing financial statements using full
PFRS and has decided to liquidate its assets.
 January 1, 2010 – Effectivity date of PFRS for SMEs
 First time adoption requires full retrospective
application.
214 USL Blue Notes Chapter 58 - SMEs

Qualitative Characteristics
 The date of transition to PFRS for SMEs is the
beginning of the earliest period for which full
comparative information is presented in accordance FULL PFRS PFRS FOR SMEs
with PFRS for SMEs in the first annual financial
statements that conform with PFRS for SMEs. Relevance Relevance
Faithful Representation Comparability
 Opening Statement of Financial Position is the SFP
Verifiability Understandability
on the date of transition to PFRS for SMEs.
Comparability Timeliness
Eg. An SME presented for the first time its financial Understandability Reliability
statements for the period ended December 31, 2014 in Timeliness Substance over Form
accordance with PFRS for SMEs on a comparative basis. Prudence
 Date of transition – January 1, 2013 Completeness
 Opening SFP – the statement of financial Materiality
position on January 1, 2013 Balance b/w Benefit and Cost

Mandatory Exceptions to the

Full Retrospective Application  Full PFRS and PFRS for SMEs have the same provisions
on the GENERAL FEATURES in the preparation and
1. Derecognition of financial assets and financial
presentation of financial statements.
liabilities
2. Hedge Accounting
3. Accounting Estimates Measurement Bases
4. Discontinued Operations
5. Measuring Non-Controlling Interest FULL PFRS PFRS FOR SMEs
Note: No restatement is required if it is impracticable to do so.
1. Historical Cost 1. Historical Cost
Reconciliation to be Made as a Result of 2. Current Cost 2. Fair Value
Transition to PFRS for SMEs 3. Realizable Value
1. Reconciliation of its equity under the previous 4. Present Value
reporting framework to PFRS for SMEs for both
a. the transition date
b. the end of the latest period presented in the
entity’s most recent annual financial statements
determined in accordance with the previous
reporting framework.
2. Reconciliation of the Profit or Loss determined in
accordance with the previous reporting framework
for the latest period in the entity’s annual financial
statements to its profit or loss determined in
accordance with PFRS for SMEs for the same period.

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Chapter 58 – SMEs
The components of financial statements of an SME are similar to those provided by Full PFRS.
Statement of Financial Position
Line Items
(Whether presentation
required or not)
Classifications
Statement of Comprehensive Income
Line Items
Presentation
Natural and Functional PFRS for SMEs and Full PFRS have the same provisions on the analysis of
Presentation of Expenses
Components of OCI
Single statement of income and
retained earnings
Statement of Changes in Equity
Preparation and Presentation
Statement of Cash Flows
Preparation and Presentation
USL Blue Notes 215
FINANCIAL STATEMENTS
PFRS for SMEs Full PFRS
 Total assets classified as held for  Total assets classified as held
is sale for sale
 Total liabilities included in  Total liabilities included in
disposal group classified as held disposal group classified as held
for sale for sale
 Investment in Associate  Investment in Associate
 Investment in Joint Venture  Investment in Joint Venture
PFRS for SMEs and Full PFRS have the same provisions on the current and
noncurrent presentation, and the definition of current assets, noncurrent
assets, current liabilities and noncurrent liabilities.
PFRS for SMEs and Full PFRS have practically the same line items in the SCI.
PFRS for SMEs and Full PFRS have the same provisions on the presentation
of total comprehensive income.
expenses by nature and by function.
 Gain or loss from foreign  Gain or loss from foreign
operation FS translation operation FS translation
 Actuarial gain or loss on defined  Actuarial gain or loss on defined
benefit plan (SME have an benefit plan
option to present this item as  Changes in FV of hedging
component of P/L or OCI.) instrument
 Changes in FV of hedging  Unrealized gain or loss from
instrument derivative contracts designated
 Unrealized gain or loss from as cash flow hedge
derivative contracts designated  Revaluation surplus
as cash flow hedge
 Revaluation surplus
May be prepared by an SME if the Prohibited by Full PFRS
changes to equity are the result only
of the following:
1. Profit or loss
2. Dividend payments
3. Prior period errors
4. Changes in accounting policy
PFRS for SMEs and Full PFRS have the same provision in the preparation and
presentation of statement of changes in equity.
PFRS for SMEs and Full PFRS have the same provision in the preparation and
presentation of statement of cash flows.
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NOTES TO FINANCIAL STATEMENTS

SME’s notes to financial statements share the same principles with Full PFRS.

ACCOUNTING CHANGES
PFRS for SMEs and Full PFRS (PAS 8) have the same If the PFRS for SMEs specifically addresses a transaction,
provisions and requirements with respect to the other event or condition, the SME shall apply the PFRS for
following: SMEs.
a. Selection of accounting policies However, the SME need not follow a requirement of the
b. Consistency of accounting policies PFRS for SMEs if the effect of doing so would not be
c. Changes in accounting policies material.
d. Changes in accounting estimates
e. Correction of prior period error

For SMEs, if there is no relevant guidance, management
shall consider the following sources in descending order:
a. The requirements and guidance in PFRS on similar
and related issues
b. The definition, recognition criteria and
measurement of assets, liabilities, income and
expenses
Under Full PFRS, in addition to the hierarchy of guidance
for an SME, management may consider the following:
a. Most recent pronouncement of other standard setting
bodies
b. Other accounting literature
c. Accepted industry practice

INVENTORIES
PFRS for SMEs and Full PFRS have practically the same provisions related to definition, measurement, cost of purchase,
cost of conversion, other cost and cost formulas for inventories.

REVENUES
PFRS for SMEs and Full PFRS share the same principles for the recognition of revenues from sale of goods, rendering of
services, interest, royalties, dividends and other significant type of revenues.

An SME shall disclose the following:

a. The accounting policies adopted for the recognition of revenue including the method for determining stage of
completion.
b. The amount of each category of revenue showing separately revenues arising for the sale of goods, rendering of
services, interest, royalties, dividends commission, government grants and any other significant type of revenue.

BASIC FINANCIAL INSTRUMENTS

Basic financial instruments of an SME

PFRS distinguishes between basic financial instruments and financial instruments not qualifying as basic financial
instruments on the basis of measurement.

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Chapter 58 – SMEs USL Blue Notes 217

 Cash  Asset-backed securities.

 Demand and fixed term deposits or bank accounts  Derivative contracts
 Trade accounts and notes receivable  Hedging instruments
 Loans receivables  Commitments to make a loan to another entity
 Commercial papers or commercial bills  Commitments to receive a loan if the commitment can
 Investments in nonputtable ordinary shares be net settled in cash
 Investments in nonconvertible and nonputtable
Outside the Scope of PFRS for SMEs
preference shares
 Commitment to receive a loan if the commitment  Investments in subsidiaries, associates, and joint
cannot be net settled in cash ventures
 Accounts payable in local and foreign currency  Financial instruments that meet the definition of an
 Loans from bank and other third parties entity's own equity
 Bonds and other similar debt instruments  Leases
 Loans to or from subsidiaries or associates that are  Employers' rights and obligations under employee
due on demand benefit plans

Accounting for basic financial instruments

An SME shall choose either to apply:
 the provisions of Sections 11 and 12 of PFRS for SMEs
 the recognition and measurement provisions of PFRS 9 and the disclosure requirements of Section 11
and 12 of PFRS for SMEs

Definition Commitment to receive a loan is a commitment from a

bank to provide credit to an entity under specified terms
Commercial paper is an unsecured and short-term debt
and conditions
instrument issued by a large corporation.
Debt instruments as basic financial instrument
Puttable instrument is a financial instrument that gives
the holder the right to sell the instrument back to the  A debt instrument shall be considered a basic financial
issuer for cash or is automatically redeemed or instrument when the creditor is assured of the
purchased by the issuer on the occurrence of an payment of the fixed amount of principal and fixed
uncertain future event or upon the death of the holder amount of interest without any conditions
 Payment and prepayment of the principal and interest
Ordinary and preference shares as basic financial must be unconditional
instrument
 Investment in ordinary shares must be nonputtable Initial measurement of basic financial instruments
 Investment in preference shares must be  Measured at the transaction price plus transaction
nonconvertible and nonputtable cost, however, if measured at fair value through profit
Investment in ordinary and preference shares is or loss the transaction costs are expensed when
nonputtable when: incurred.
 The entity does not have an option to sell back the  If payment is deferred beyond normal business terms
shares to the issuer for cash. or is financed at a rate of interest that is not of market
 There is no arrangement that could result in the rate, it is measured at the present value of the future
shares being automatically sold or returned to the payments discounted at the market rate of interest
issuer because of a future event

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Subsequent measurement of basic financial Impairment of basic financial instrument at amortized cost
instruments Impairment loss is the difference between the carrying
 Measured at fair value through profit or loss, amount and the present value of estimated cash flows
amortized cost or cost less impairment. using effective interest rate.

Measurement of Some Basic Financial Instrument Impairment of basic financial instrument at cost less
Basic debt instrument is measured at amortized cost impairment
using effective rate of interest. Impairment loss is the difference between carrying
amount and the best estimate of the amount that
Commitments to receive a loan is measured at cost less
would be received if the asset is sold.
impairment
Investments in nonputtable ordinary shares and Treatment of impairment
nonputtable and nonconvertible preference shares Recognized immediately in profit or loss
 Measured at fair value through profit or loss if
publicly traded Reversal of impairment
 Measured at cost less impairment if not publicly
Recognized in profit or loss, however, reversal shall not
traded
result in carrying amount exceeding the previous
carrying amount had no impairment been recognized.

INVESTMENT IN ASSOCIATE
Methods of accounting for investments in associate
PFRS for SMEs Full PFRS
Can choose among the three method below to apply Only the equity method is allowed to be used.
for the entire investments:
a. Cost model
b. Equity method (Same w/ Full PFRS
c. Fair value model

INVESTMENT PROPERTY
PFRS for SMEs Full PFRS
On Subsequent Fair Value Model; Either fair value model
Measurement or cost model
if FV cannot be
measured reliably,
Cost-depreciation-
impairment model

PROPERTY, PLANT AND EQUIPMENT

Full PFRS and PFRS for SMEs have the same definition of property, plant and equipment and provide the same initial
measurement of an item of property, plant and equipment.

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Chapter 58 – SMEs USL Blue Notes 219

PFRS for SMEs Full PFRS

All items of PPE are subsequently measured at cost less An entity shall choose the cost model or revaluation
accumulated depreciation and any accumulated model as its accounting policy to an entire class of PPE.
impairment losses only.

They are same with respect to other matters related to PPE, such as depreciation method, useful life, residual value,
depreciation of significant components, impairment and derecognition.

It does not address noncurrent asset held for sale. A It addresses noncurrent asset held for sale.
plan to dispose of an item of PPE is an indicator of
impairment that triggers the calculation of the asset’s
recoverable amount for the purpose of determining
whether asset is impaired.

GOVERNMENT GRANT
PFRS for SMEs Full PFRS
A government grant is recognized when the conditions Government grant is recognized when there is a
are actually satisfied. reasonable assurance that the entity will comply with
the specified conditions.

It does not allow an entity to match the grant with the A government grant is recognized as income over the
expense for which it is intended to compensate or the periods necessary to match them with the related costs
cost of the asset that is used to finance. for which they are intended to compensate.

The government grant is a deferred income until the The government grant related to asset may be treated
conditions are actually satisfied. either as deferred income or a reduction in the carrying
amount of the asset.

BORROWING COSTS
PFRS for SMEs Full PFRS
An SME shall recognize all borrowing costs as expense of Borrowing costs that are directly attributable to the
the period when incurred. There is no capitalization of acquisition, construction or production of a qualifying
interest even if the interest is directly attributable to the asset shall be capitalized as part of the cost of the asset.
acquisition, construction or production of qualifying Borrowing costs that are not directly attributable to a
asset. qualifying asset shall be expensed when incurred.
It does not require any additional disclosure.

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220 USL Blue Notes Chapter 58 - SMEs

INTANGIBLE ASSETS
PFRS for SME Full PFRS
All research and development costs are expense when Research costs are expensed when incurred. However,
incurred. development cost may be capitalized when specific
criteria are met, particularly when technological
feasibility has already been established.

Measured subsequently using cost model only Cost model or revaluation model

Useful life of an IA is considered finite. Useful life of an IA is considered finite or infinite.

There is an assumption of 10 years useful life. There is no assumption of 10 years useful life.

All IA including goodwill, are amortized. IAs with finite life are amortized while IA with indefinite
life are not amortized but tested for impairment.

IAs are tested for impairment when there is an IAs with a finite useful life are tested for impairment
indication that the IA may be impaired. when there is an indication that the IA may be impaired.
IAs with indefinite useful life are tested for impairment
annually and when there is an indication that the IA may
be impaired.

IMPAIRMENT OF ASSETS
PFRS for SME Full PFRS
Full PFRS and PFRS for SMEs are practically the same with respect to the following:
a. Recognition and measurement of impairment loss
b. Definition of fair value less cost to sell and value in use
c. Internal and external indicators of impairment
d. Reversal of impairment

Assets, including goodwill, are tested for impairment Asset with a finite useful life are tested for impairment
when there is an indication that the asset may be when there is an indication that the asset may be
impaired. impaired.
However the following asset are tested for impairment
annually and when there is an indication that the asset
may be impaired:
a. Goodwill
b. Intangible assets with an indefinite useful life or
an intangible asset not yet available for use.

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PROVISIONS AND CONTINGENCIES

There are no significant differences between PFRS for SMEs and full PFRS with respect to provisions and
contingencies.
The PFRS for SMEs and full PFRS share the same principles for accounting and reporting provision and for disclosing
contingent liabilities and contingent assets.

LEASES
The PFRS for SMEs and Full PFRS are practically the same with respect to the accounting and reporting for leases.

The PFRS for SMEs applies to all leases, except the following:
 Leases in the exploration industry
 Licensing agreements for such items as motion picture films, video recordings, plays, manuscripts, patents and
copyrights.
 Investment property
 Biological assets
 Leases that could result in a loss to either party as a result of contractual terms that are unrelated to changes in
the price of leased assets, changes in foreign exchange rate or a default by one of the counterparties
 Onerous operating leases

EMPLOYEE BENEFITS
PFRS for SME Full PFRS
Actuarial gains and losses are recognized immediately in Actuarial gains and losses are recognized immediately in
full in either P/L or OCI full in OCI

The projected unit credit method is used in measuring The projected unit credit method must be used in
the defined benefit liability if the information that is measuring the defined benefit liability.
needed to make such a calculation is already available or
can be obtained without undue cost or effort.

All changes in the fair value of the plan assets are Interest income on plan assets is recognized in P/L.
recognized in P/L. Actual return on plan assets less interest income is
recognized in OCI

Full PFRS and PFRS for SMEs share the same principles for the recognition and measurement of the following:
a. Short-term employee benefits
b. Defined contribution plans
c. Other long-term employee benefits
d. Termination benefits

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INCOME TAX
PFRS for SMEs share the same accounting principles with regards to accounting income tax except the following:
 An SME shall not recognize a deferred tax asset or liability for temporary differences associated with unremitted
earnings from foreign subsidiaries, branches, associates and joint ventures to the extent that the investment is
essentially permanent in nature, unless it Is apparent that the temporary differences will reverse in the foreseeable
future.
 An SME shall not recognize a deferred tax liability for temporary differences associated with initial recognition of
goodwill.

PFRS for SMEs Full PFRS

Valuation allowance is recognized for a deferred tax The concept of valuation allowance is not applicable.
asset.

SME shall not recognize a deferred tax asset or liability
for temporary differences associated with unremitted
earnings from foreign investments in subsidiaries,
branches, associates and joint venture to the extent that
the investments are essentially permanent in duration.
Under Full PFRS, the same prohibition applies but it is
applicable to all investment in subsidiaries, branches,
associates and joint ventures, whether domestic or
foreign.

SHARE-BASED COMPENSATION
All principles are substantially the same between Full PFRS and PFRS for SMEs except that under the latter, share
options must be measured at fair value on the date of grant.

SPECIALIZED ACTIVITIES AND HYPERINFLATION

PFRS for SMEs and full PFRS practically have the same principles for the recognition and measurement of biological
assets and agricultural produce.

PFRS for SMEs Full PFRS

PFRS for SMEs shall subsequently measure the asset Under full PFRS, the asset shall be measured using
using the cost model only. either cost or fair value model

Full PFRS and PFRS for SMEs have the same provision on the recognition and measurement of a service concession.

PFRS for SMEs and full PFRS are the same in all aspects of accounting for an entity whose functional currency is the
currency of a hyperinflationary economy.
Note: The PFRS for SMEs does not establish an absolute rate at which hyperinflation is deemed to arise. Hyperinflationary condition is a
matter of judgment.

ADVANCE ACCOUNTING

Definition:
Joint controlled entity involves the establishment of an entity in which each venturer has an interest.

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Joint venture is a contractual arrangement whereby two or more parties undertake an economic activity which is
subject to joint control.
Joint controlled operation involves the use of the assets and other resources of the venturers rather than the
establishment of an entity.
Joint controlled asset involves the joint control and often the joint ownership by the venturers of one or more assets
contributed to or acquired for the purpose of the joint venture.
Combined FS are single set of FS of two or more entities controlled by a single investor.
Functional currency is the currency of the primary economic environment in which the entity operates.
Presentational currency or measurement currency is the currency in which the FS are presented.
Business combination is the bringing together of separate entities or businesses into one reporting entity.
Special purpose entity (SPE) is an entity created to accomplish a narrow objective like to effect a lease, to undertake
research and development activities or to securitize financial asset.

Reporting of Joint controlled operation.

A venture shall recognize in its separate and consolidated FS the ff:
a. the asset it controls and the liabilities it incurs
b. The expense it incurs.
c. The share of the income it earns from the joint venture operation

Reporting of Joint controlled Assets

A venture shall recognize in its separate and consolidated FS the following:
a. share of the jointly controlled assets, classified according to the nature of the assets.
b. any liability which the venturers incurred.
c. its share of the liability incurred jointly with the other venturers.
d. any income earned from the use of its share of the jointly controlled assets.
e. any expense which the venturer has incurred and its prorate share of expenses incurred by the joint venture.

Accounting for a Joint controlled entity

An SME shall account for all of its interest in jointly controlled entities using one of the following:
a. Cost method
b. equity method
c. Fair value method

Accounting for all business combination

All business combination shall be accounted for by applying the purchase method.
Cost of business combination
An SME shall measure the cost of business combination as the aggregate of:
a. The FV, at the date of exchange, of assets given liabilities incurred or assumed and equity instruments issued by the
acquirer, in exchange for control of the acquire.
b. Any cost directly attributable to the business combination
Contingent consideration
Included in the cost of combination if it is probable and can be measured reliably.

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224 USL Blue Notes Chapter 58 - SMEs

Goodwill in a business combination

At acquisition date, an SME shall recognize goodwill acquired in business combination as an asset.
Initially, Goodwill = consideration – Net FV of identifiable assets, liabilities and contingent liability.
After initial recognition, the SME shall measure the goodwill at cost less accumulated amortization and accumulated
impairment loss
Core principle for consideration of financial statement of an SME
G: The PFRS for SME provides that a parent shall present consolidated FS in which it consolidates its investment in all
subsidiaries.
A subsidiary is not excluded from consolidation:
a. even if having dissimilar business activities from the group.
b. because it operates in a jurisdiction that imposes restriction on transferring cash or other assets out of its
jurisdiction.
c. because the investor is a venture capital organization, mutual fund, unit trust or similar entity.
EX:
a. the parent itself is a subsidiary
b. The parent has no other subsidiaries other than one which was acquired with the intention of selling or disposing of
it within one year.

Accounting for a subsidiary acquired with the intention of selling or disposing of it within one year.
Either:
a. at Fair value(FV) which changes in FV recognized in profit or loss, if the FV can be measured reliably.
b. at cost less impairment loss, if the FV cannot be measured reliably.

Accounting for investment in subsidiaries, jointly controlled entities and associated in separate FS
a. At cost less impairment
b. at Fair value, with the change in FV recognized in P/L.

PFRS for SME Full PFRS

Identifies three type of joint venture, namely joint A joint arrangement is classified either as joint
controlled operation, JC asset and JC entity operation or joint venture.

All investment in JC entities are accounted for using the The investment in joint venture shall be accounted for
cost, equity or the fair value model using the equity method only

Transaction cost are included in the cost of combination Cost are expense immediately

Contingent consideration is included as part of cost of Included regardless of probability of payment

combination it is probable and can be measured reliably

Goodwill is amortized over its useful life which is Amortization of goodwill is not permitted
presumed to be 10 years if the entity is unable to make a
reliable estimate of the useful life

Practical Accounting 1 Theory of Accounts