SME- Small and Medium-sized Entities
and customers who are not involved in the
October 13, 2009 – the adoption of IFRS for
SME’s was approved by the Financial Reporting
Standard Council issued by the International
Accounting Standards Board or IASB.
The Philippine Securities and Exchange
Commission En Banc in its meeting on
December 3, 2000 also resolved to adopt the
PFRS for SME’s as part of its rules and
regulation.
There are 35 sections in comprising the PFRS for
SME’s relating to topics basically on financial
accounting and advanced accounting.
The International Accounting Standards Board
defines “small and medium sized entities” or
SME’s as entities that:
a. Do not have public accountability, and
b. Publish general purpose financial
statements for external users.
The IASB concluded that, regardless of size,
entities whose securities are traded in a public
market should follow full PFRS for SME’s.
Public accountability of listed entities is
recognized by the government by establishing
laws and regulations that deal with market
regulations and disclosures to inventors.
Financial Institution such as banks, credit
unions, insurance companies, securities brokers
or dealers, pension fund, mutual funds and
investment funds are in most cases regulated by
laws and government agencies.
The primary business for financial institution is
to hold and manage financial resources
entrusted to them by a broad group of clients
management of the entities.
As such, financial institutions are “publicly
accountable” because the entities act in a
fiduciary capacity.
Financial institutions must follow full PFRS and
not PFRS for SMEs.
The PFRS for SMEs is designed to apply to the
general purpose financial statements and other
financial reporting of profit oriented entities
that “do not have public accountability”.
The objective of general purpose financial
statements prepared in accordance with PFRS
for SMEs is to provide useful information about
entity’s financial position, performance and
cash flows to wide range of users who are not in
a position to demand reports tailored to meet
their particular in needs.
SME under Philippine jurisdiction
The IASB definition of SMEs does not include
“size criteria” for determining what a small is
and medium-size entities because it is not
feasible to develop size test that would be
applicable and long lasting in numerous
countries.
Under Philippine jurisdiction, the definition of
small and medium-sized entity (SME) includes
size criteria in terms of total liabilities.
The definition of SME is set forth in Philippine
Securities and Exchange Commission En Banc
Resolution dated August 13, 2009.
The Philippine Securities and Exchange
Commission defines SME as an entity:
a. With total assets between P3,000,000
and P350,000,000 OR with the total
liabilities between P3,000,000 and
P250,000,000
b. That is not required to file financial
statements under SRC rule 68.1
This SRC Rule 68.1 pertains to “listed
entities” or entities whose securities are
traded in an exchange market and
entities with assets of at least
P50000000 and have 200 or more
holders each holding at least 100 shares
of a class of equity securities.
c. That is not in the process of filing
financial statements for the purpose of
issuing any class of instruments in a
public market.
d. 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.
e. That is not a public utility.
Micro-business entities
Micro- business entities are entities
whose total assets or total liability are
below the P3000000 floor threshold.
Micro- business entities have the option
to use any of the following bases of the
accounting in the preparation of the
financial statement:
a. Full PFRS
b. PFRS for SME’s
c. Another acceptable basis of
accounting
First- time adopter
A first- time adopter of PFRS for SMEs is an
entity that presents the first annual financial
statements that conform with PFRS for SMEs
regardless of whether the previous accounting
framework was full PFRS or another set of
generally accepted accounting principle.
Date of Transition
The date of Transition to PFRs for SMEs is the
beginning of the earliest period for which full
comparative information is presented in
accordance with PFRS for SMEs in the first
annual financial statements that conform with
PFRS for SMEs.
The PFRS for SMEs is effective for annual
periods beginning on or after January 1, 2010.
Opening statement of financial position is the
statement of financial position on the date of
transition to PFRS for SMEs.
In the opening of statement of financial
position, a first time adopter shall:
a. Recognize all assets and liabilities
whose recognition is required by the
PFRS for SMEs
b. Not recognize as assets or liabilities if
the PFRS for SMEs does not permit such
recognition.
c. Reclassify items that it recognized
under the previous accounting
framework as one type of asset, liability
or component of equity, but a different
type of asset, liability or equity under
PFRS for SMEs.
d. Apply PFRS for SMEs in measuring all
recognized assets and liabilities.

First time adoption requires full retrospective
application of PFRS for SMEs effective at the
reporting date for an entity’s annual financial
statements that conform with PFRS for SMEs.
Mandatory Exceptions to Retrospective
Application
A first time adopter does not change the
accounting that it followed previously for any of
the following transactions.
a. Derecognition of financial assets and
financial liabilities
b. Hedge accounting
c. Accounting estimates
d. Discontinued operation
e. Measuring noncontrolling interest
In general no restatement of the opening
statement financial position is required if it is
impracticable to do so.
Impracticability means “the entity cannot apply
restatement after making every reasonable
effort to do so”
Reconciliation
A first time adopter shall make the following
reconciliations in the financial statements:
1. Reconciliation of equity
a. The transition date
b. The end of the latest period
2. Reconciliation of the profit and loss
_____________________________________
Qualitative characteristic of financial statement
of SME
Understandability – financial information must
be comprehensible or intelligible if it is to be
most useful.
Relevance – the capacity of the information to
influence an economic decision
Materiality – a practical rule in accounting
which dictates that strict adherence to GAAP is
not required when the item is insignificant
enough to affect the evaluation and fairness of
the financial statement.
Reliability – the quality of information that
assures the users that the information is free
from bias and error and faithfully represents
what it purports to represent.
Substance over Form – means that if there is
conflict between the economic substance of a
transaction and its legal form the economic
substance shall prevail.
Prudence – the desire to exercise care and
caution when dealing with the uncertainties in
the measurement process such that assets and
income are not overstated or liabilities and
expenses are not understated.
Completeness – means that relevant
information should be presented in a way that
facilitates understanding and avoids erroneous
implication.
Comparability – the ability to bring together for
the purpose of noting points of likeness and
difference.
Timeliness – means having information
available to decision makers in time to influence
an economic decision.
Measurement of elements
Under the PFRS for SMEs, the common
measurement bases are two only namely:
a. Historical Cost
b. Fair value
Comparison with Full PFRS
The PFRS for SMEs and full PFRS share the same
provisions on the definition, recognition, and
measurement of financial statements.
General Features of Financial Statements
The General features in the presentation of the
financial statements of SMEs sre:
Fair Representation
The financial statements shall present fairly the
financial position, financial performance, and
cash flows of an entity.
Compliance with PFRS for SMEs
An entity whose financial statements comply
with PFRS for SMEs shall make explicit and
unserved statements of such compliance in the
notes.
Going Concern
The accounting entity is viewed as continuing in
operation indefinitely in the absence of
evidence of the contrary.
Accrual Basis
An entity shall prepare the financial statements
except for cash flows information, using the
accrual basis of accounting.
Materiality and Aggregation
An entity shall present separately each material
class of similar items
Offsetting
Assets and Liabilities and income and expenses,
when material shall not be offset against each
other.
Frequency of reporting
An entity shall present a complete set of
financial statements at least annually.
Comparable information
Except when permitted or required otherwise
by PFRS for SMEs, an entity shall disclose
comparative information in respect of the
previous periods of all the amounts reported in
the current period’s financial statements.
Consistency of information
Implicit to the presentation of comparable
information is the principle of consistency. Te
principle of consistency requires that “the
accounting methods and practices shall be
applied on a uniform basis from period to
period”.
___________________________
Statement of Financial position
Comparison with Full PFRS
Full PFRS and PFRS for SMEs requires practically
the same line items to be presented in the face
of the statement financial position.
The ff. items are required to be presented
under full PFRS but not under PFRS for SMEs:
a. Total of assets classified as held for sale
b. Total of liabilities included in the
disposal group classified as held for sale
PFRS for SMEs requires presentation of both
investment in associates and investment on
joint ventures.
Full PFRS and PFRS for SMEs have the same
provision on the current and noncurrent
separate presentation and definition of current
assets, noncurrent assets, current liabilities an
noncurrent liabilities.
An SME shall disclose, either in the statement of
financial position or in the notes, the following
subclassifications of line items presented:
a. Property land and equipment
1. Land and Building
2. Machinery
3. Boats
4. Aircraft
5. Motor Vehicles
6. Furniture and Fixtures
7. Office Equipment
b. Trade and other receivables showing
separately amounts payables to trade
related parties, amounts due from
other parties and accrued incomes not
yet billed.
c. Inventories with the ff.
subclassifications
1. Raw materials
2. Work in process
3. Finished goods
d. Trade and other payables, showing
separately amounts payable to trade
suppliers, payable to related parties,
deferred income and accruals
e. Provision for employees benefits and
other provisions
f. Classes of equity such as share capital,
share premium retained earnings and
items of other comprehensive income.
___________________________________
Comprehensive Income
The changes in equity during a period
resulting from transactions and other events,
other than changes resulting from transactions
with owners in their capacity as owners.
This includes:
a. Components of Profit and Loss
b. Components of comprehensive income
Comparison with full PFRS
1. Gain or loss from translation of the
financial statements of a foreign
operation
2. Remeasurements including actual gain
or loss on projected benefit obligation.
3. Unrealized gain or loss from derivative
contracts designated as cash flow hedge
4. Unrealized gain or loss on equity
investments measured at fair value
through other comprehensive income
 5. Unrealized gain or loss on debt
investment measured at fair value
through other comprehensive income
6. Revaluation surplus during the year
7. The change in fair value attributable to
credit risk of a financial liability
designated at fair value through profit
or loss.
An SME shall present the total comprehensive
income for a period using either of the
following:
a. Single Statement of comprehensive
income
b. Two Statement
Full PFRS and PFRS for SMEs have the same
provisions on the presentation of total
comprehensive income
Statement of changes in equity
The SME shall present a statement of chances in
equity showing in the statement:
a. Total comprehensive income for the
period
b. For each component of equity, the
effects of retrospective application
c. For each component of equity, a
reconciliation between the carrying
amount at the beginning and at the end
of the period separately, disclosing
changes resulting from:
1. Profit or loss
2. Each item of other comprehensive
income
3. The amount of investments by and
dividends and other distribution to
owners
PFRS for SMEs and Full PFRS have the same
provisions in the preparation and
presentation of statement of changes in
equity.
Notes to financial Statements
This provides the narrative description or
disaggregation of items presented in the
financial statements and information about
items that did not qualify for recognition.
Comparison with FULL PFRS
The PFRS for SMEs and Full PFRS are the
same in the matter of presenting the notes
to financial statements.
Related Party transactions
The PFRS for SMEs requires disclosures of
related party relationship where control
exists irrespective of whether there has
been transaction between the related
parties.
In other words relationship between parent
and subsidiaries shall be disclosed
regardless of whether there have been
transactions between those related parties
Accounting Changes
Accounting policies are the specific principles
bases conventions rules and practices applied
by an entity in preparing and presenting
financial statements.
Comparison with full PFRS
PFRS for SMES and Full PFRS have the same
provisions and requirements with respect to the
following:
 a. Selection of accounting policies
If the PFRS for SMEs does not specifically
address a transaction, other event or condition,
management shall use its judgement in
developing and applying an accounting policy
that results in information that is relevant and
reliable.
b. Consistency of accounting policies
c. Changes in accounting policies
Retrospective Application – is applying new
accounting policy to transactions, other events
and condition as if that policy had always been
applied.
Prospective Application – the new accounting
policy is applied to events and transactions
occurring after the date at which the policy is
changed
d. Changes in accounting estimates
e. Correction of prior period errors
Omissions and misstatements in the financial
statements for one or more periods arising from
a failure to use or misuse of reliable
information.
Inventories and Revenue
Inventories are assets held for sale in the
ordinary course of business, in the process of
production for such sale, or in the form of
materials or supplies to be consumed in the
production process or in the rendering of
services.
Measurement of inventories
An SME shall measure inventories at the lower
estimated selling price less cost to complete
and dispose.
Comparison with full PFRS
The PFRS for SMEs and full PFRS have practically
the same provisions related to definition,
measurement, cost of purchase, cost of
conversion, or other cost and cost formulas for
inventories.
Revenue
PFRS for SMEs and full PFRS share the same
principles for the recognition of revenue from
sale of goods, rendering of services, interest,
royalties, dividends and other significant type of
revenue.
An SME shall measure revenue at fair value of
the consideration received or receivable.
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 revenue
arising from sale of goods, rendering of
services, interest, royalties, dividends,
commission, government grants and
any other significant type of revenue,
Basic Financial Instrument
Both the PFRS for SMEs and full PFRS have the
same definitions of a financial instrument,
financial asset and financial liability.
Financial Instrument is a contract that gives rise
to a financial asset of one entity and financial
liability or equity of another entity.
Basic Financial Instrument
The PFRS for SMEs distinguishes between basic
financial instruments and financial instruments
not qualifying as basic financial instruments.
Financial Instruments:
1. Cash
2. Demand and fixed term deposits or
bank accounts
3. Trade accounts and notes receivable
4. Loans receivable
5. Commercial papers or commercial bills
6. Investment and nonputtable ordinary
shares
7. Investment in nonconvertible and
nonputtable preference shares.
8. Commitment to receive a loan if the
commitment cannot be net settled in
cash
9. Accounts payable in local and foreign
currency
10. Loans from bank and other third parties
11. Bonds and similar debt Instruments
12. Loans to or from subsidiaries or
associates that are due on demand
Simply stated, a debt instrument shall be
considered a basic financial instrument when
the creditor is assured of the payment of the
fixed amount of principal and fixed amount of
interest without any conditions.
The payment or repayment of the [principal and
interest must be unconditional.
Definitions
Commercial Paper – is an unsecured and short
term debt instrument issued by a large
corporation.
To be classified as basic financial instrument,
the investment in ordinary shares must be
nonputtable
Puttable instruments – a financial instrument
that gives the holder the right to sell the
instrument back to the issuer for cash upon
exercise of the put or is automatically
redeemed or purchased by the issuer on the
occurrence of an uncertain future event or
upon the death of the holder.
Initial measurement
The PFRS for SMEs provides that basic financial
instruments are initially measured at the
transaction price, including transaction costs.
Subsequent measurement
The PFRS for SMEs provides that basic financial
instruments are subsequently measured at fair
value through profit or loss, amortized cost or
cost less impairment depending on the
instruments.
Measurement of nonbasic financial instruments
The PFRS for SMEs provides that at initial
recognition all financial instruments not
qualifying as basic financial instruments are
measured at fair value, which is normally the
transaction price
Associate
An entity over which the investor has significant
influence but is neither a subsidiary nor a joint
venture of the investor.
Significant influence is the power to participate
in the financial and operating policy decisions of
the associate but is not control or joint control
over those policies.
Significant influence is presumed to exist when
the investor holds at least 20% of the investee’s
voting power.
Measurement
The PFRS for SMEs provides that an investor
shall account for all of its investments in
associates using any one of the following:
a. Cost Model
Under the cost model the investment in
associate is initially measured at transaction
price including transaction cost
The investment in associate carried at fair value
is not tested for impairment.
b. Equity Model
The same as equity method on full PFRS, under
the equity method, the investment account is
initially recognized at transaction price including
transaction cost.
The investment in associate carried at fair value
is tested for impairment
c. Fair value Model
The investment in associate is initially measured
at the transaction price, excluding transaction
cost.
Comparison with Full PFRS
The significant difference between PFRS for
SMEs and Full PFRS lies in the same
measurement of the investment in associate
Under PFRS for SMEs, all investments in
associates are accounted for using any one of
the cost model, equity model and fair value
model.
Moreover, areas covered under full PFRS but
not in PFRS for SMEs include the following:
a. Guidance on significant influence
b. Consequences when investment ceases
to be an associate
c. Profit and loss from upstream and
downstream transactions
Investment Property
The PFRS for SMEs defines investment property
as:
Property (land, building or part of a building)
held by an owner or by the lessee under a
finance lease to earn rentals or for capital
appreciation or both rather than for
a. Use in the production or supply of
goods or services or for administrative
purpose, or
b. Sale in the ordinary course of business.
Mixed use property shall be separated between
investment property and property, plant and
equipment.
An SME shall measure investment property
initially at cost.
Subsequent measurement of investment
property
The PFRS for SMEs provides that investment
property whose fair value can be measured
reliably without undue cost or effort shall be
measured at fair value at the end of the
reporting period.
Any changes in fair value shall be recognized in
profit or loss.
Transfer
An SME shall transfer property to or from
investment property only when the property
meets or ceases to meet the definition of
investment property.
Comparison with Full PFRS
Under PFRS for SMEs, Investment property is
measured at fair value if the fair value can be
measured reliably without undue cost or effort
on an ongoing basis.
Full PFRS allows an accounting policy choice of
either fair value or cost model.
Property Plant and Equipment
The PFRS for SMEs defines Property plant and
equipment as tangible assets that:
a. Are held for use in the production or
supply of goods or services, for rentals
to others, or for administrative
purposes, and
b. Are expected to be used during more
than one period
Full PFRS and PFRS for SMEs have the same
definition of property plant and equipment.
Measurement
An item of property plant and equipment shall
be initially measured at cost.
An SME shall measure all items of property,
plant and equipment after initial recognition at
cost less accumulated depreciation and any
accumulated impairment losses.
Depreciation policy
Other assets shall be depreciated over their
useful lives as a single asset.
With some exceptions, such as quarries and
sited used for landfill, land has an unlimited life
and therefore is not depreciated.
Depreciation method
An SME shall select depreciation method that
reflects the pattern in which it expects to
consume the future economic benefits from the
asset.
The possible depreciation methods include
straight line, diminishing balance and
production method.
The PFRS for SMEs does not address noncurrent
asset held for sale. The item property plant and
equipment held for sale is not separately
presented.
Comparison with Full PFRS
Full PFRS provides that an entity shall choose
the cost model or revaluation model as an
accounting policy and shall apply that policy to
an entire class of property, plant and
equipment.
Under PFRS for SMEs, property, plant and
equipment shall be measured using the cost
model only.
Government Grant Borrowing Cost
A government grant is assistance by
government in the form of a transfer of
resources to an entity in return for past for
future compliance with specified conditions
relating to the operating activities to the entity.
Comparison with full PFRS
The significant difference between PFRS and
PFRS for SMEs with respect to government
grant is as follows:
1. Under full PFRs, a government grant is
recognized when there is a reasonable
assurance that the entity will comply
with the specified conditions.
Under PFRS for SMEs, a
government grant is recognized when
the conditions are actually satisfied.
2. Under full PFRS, a government grant is
recognized as income over the periods
necessary to match the grant with the
related cost for which it is intended to
compensate
PFRS for SMEs does not allow
an entity to match the grant with the
expense for which is intended to
compensate or the cost of the asset
that it used to finance.
3. Under full PFRS grant related to assets
may be treated either as deferred
income or a reduction in the carrying
amount of the asset.
There is no such option under
PFRS for SMEs.
Under PFRS for SMEs, the grant is a deferred
income until the conditions are actually
satisfied.
Intangible assets
The PFRS for SMEs defines intangible assets as
an identifiable nonmonetary asset without
physical substance
The Intangible asset is identifiable when:
a. It is separable
b. It arises from contractual or other legal
rights.
Initial measurement
a. An SME shall measure an intangible
asset initially at cost.
b. The cost of an intangible asset acquired
in the business combination is equal to
the fair value on the acquisition date.
c. The cost of an intangible asset acquired
by way of government grant is equal to
the fair value at the date of the grant is
recovered or receivable
d. The cost of an intangible asset acquired
by exchange is equal to the fair value of
the asset given up or fair value of the
asset received, whichever is clearly
determinable.
Under PFRS for SMEs all intangible assets shall
be considered to have a finite useful life.
Comparison with full PFRS
1. Under PFRS for SMEs, all research and
development costs are recognized as
expense when incurred.
Under full PFRS research cost
are expensed when incurred.
 2. Under PFRS for SMEs intangible assets
are measured subsequently using the d. Reversal of impairment
cost model only.
Under full PFRS intangible
assets are measured subsequently using
the cost model only.

Impairment assets

General principle on IMPAIRMENT

If the recoverable amount of an asset is less

than the carrying amount, the entity shall
reduce the carrying amount of the asset to the
recoverable amount.

The recoverable amount of the asset or a cash

generating unit is the higher between fair value
less cost of disposal and value in use.

Fair value is the price that would be received to

sell an asset or paid to transfer a liability in an
orderly transaction between market
participants and measurement date.

Cost of disposal – is an incremental cost directly

attributable to the disposal of an asset,
excluding finance cost and income tax expense.

Value in use is the present value of the future

cash flows expected to be derived from an asset
or cash generating unit.

Comparison with 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 of
disposal and value in use
c. Internal and external indicators of
impairment