PFRS for Small

Entities
 þ Scope of PFRS for
Small Entities (“the
Framework”)
þ Key Differences with
Topics
PFRS for SME and
Full PFRS
þ Transitional
Provisions
Scope of the Framework
 Financial Reporting Framework
• On March 22, 2018, the Philippine SEC approved the adoption of the PFRS for
Small Entities.
• On March 26, 2018, the SEC issued SEC Memorandum Circular No. 5, Series of
2018, amending Part 1, Section 2 of SRC Rule 68, As Amended. Summarized
below are the framework applicable to each type of entity (quantitative criteria
are in millions):

Entities* Total assets Total liabilities Framework

Large >₱350 >₱250 PFRS
Medium-sized >₱100 - ₱350 >₱100 - ₱250 PFRS for SME
PFRS for Small
Small ₱3 - ₱100 ₱3 - ₱100
Entities
Income tax basis or
Micro <₱3 <₱3 PFRS for Small
Entities
*Publicly-accountable entities have no quantitative criteria
 Brief Background on PFRS for Small Entities
WHO? Who should adopt PFRS for Small Entities?

ü Small entities as defined by Philippine SEC

However, entities who have operations or investments that are based

or conducted in a different country with different functional
currency shall not apply this framework and should instead apply full
PFRS or PFRS for SMEs.
 Brief Background on PFRS for Small Entities
WHAT? What are small entities? (SRC Rule 68, As Amended)
ü Small entities are those that meet all of the following criteria:
Quantitative characteristics
A Total assets ₱3 million - ₱100 million, or
Total liabilities ₱3 million - ₱100 million
If the entity is a parent company, the said amounts shall be based on the
B
consolidated figures.
Qualitative characteristics

C Not required to file financial statements under Part II of SRC Rule 68;

Not in the process of filing their financial statements for purpose of

D
issuing any class of instruments in public market; and

E Not holders of secondary licenses issued by regulatory agencies

 Brief Background on PFRS for Small Entities
WHO? Who can opt for exemption from mandatory
adoption of PFRS for Small Entities?

ü A small entity with group affiliations

reporting under or moving towards
þ Full PFRS or PFRS for SMEs, or

þ Full IFRS or IFRS for SMEs.

 Brief Background on PFRS for Small Entities
WHO? Who can opt for exemption from mandatory
adoption of PFRS for Small Entities?

ü Has a short term projection that show that it will breach the
quantitative thresholds and the breach is expected to be
significant and continuing due to its long-term effect on the
company’s asset size;

ü Has been preparing financial statements using full PFRS or PFRS for
SMEs and has decided to liquidate;

ü Such other cases that the Commission may consider as valid

exceptions from the mandatory adoption of PFRS for Small Entities.
 Practice Questions
What will happen if ME or SE breaches the required SEC
quantitative threshold for the definition of a ME or SE:

q At reporting date?

q During the year?

 Illustrative Example
Company A’s reporting period is December 31.

Company A’s total assets and total liabilities as at December 31, 20x2
and 20x1 are as follows:

20x2 20x1
Total assets P125,000,000 P90,000,000
Total liabilities 70,000,000 50,000,000
 Illustrative Example
20x2 20x1
Total assets P125,000,000 P90,000,000
Total liabilities 70,000,000 50,000,000
Questions

What is the appropriate framework that Company A should adopt in 20x2 in the
following scenarios:

1. In 20x2, Company A considers the breach in total assets as significant and

continuing.

PFRS for SEs

 Illustrative Example

20x2 20x1
Total assets P125,000,000 P90,000,000
Total liabilities 70,000,000 50,000,000

2. In 20x2, Company A considers the breach in total assets as significant but not
continuing.

PFRS for SEs

Financial Statement
Presentation
 Financial Statement Presentation
Complete set of FS shall include: PFRS for
PFRS for
Small PFRS
SME
Entities

Statement of Financial Position

Statement of Income

Statement of Comprehensive Income

Statement of Changes in Equity

Statement of Cash Flows

Notes, comprising summary of

significant accounting policy and
other explanatory information
 Financial Statement Presentation
Complete set of FS shall include: PFRS for
PFRS for
Small PFRS
SME
Entities

If changes to equity during the

period arise from:

w Profit or loss
w Payment of dividends
w Correction of prior year errors
and
w Changes in accounting policy

Entities may present Statement of

Income and Retained Earnings.
Accounting Policies,
Estimates, and Errors
 Accounting Policies, Estimates,
and Errors
PFRS for Small
PFRS for SME PFRS
Entities
Changes in accounting policies and
Correction of prior period errors
Adjust the
Restate the earliest period
opening balance
presented and each comparative
How recognized? of current year
period as if the policy had always
retained
applied, to the extent practicable
earnings
Is restatement of
comparative
information needed?
N/A,
Is “third balance
restatement not
sheet” needed*?
required
*Required if the entity retrospectively applies an accounting policy, restates items, or reclassifies items,
and those adjustments had a material effect on the information in the statement of financial
position/balance sheet at the beginning of the comparative period.
Inventories
 Inventories
Measurement

Cost
Small entities
PFRS for

Lower of OR
Probable
Market
selling price
PFRS and

Cost
PFRS for
SME

Lower of OR
Estimated selling price less
cost to complete and sell
Investment Property
 Investment Property
PFRS for Small Entities PFRS for SME PFRS

Scope

Accounting for Same Same

investments in land or
buildings that meet the
definition of investment
property.

Only investment
property whose fair
value can be measured
reliably without undue
cost or effort
 Investment Property
PFRS for Small Entities PFRS for SME PFRS

Definition

Held by owner to earn Held by owner or by the Same with PFRS for SME
rent or for capital lessee under a finance
appreciation or both, lease to earn rent or for
rather than for: capital appreciation or
both, rather than for:
a) use in the production
or supply of goods or a) use in the production
services or for or supply of goods or
administrative purposes, services or for
or administrative purposes,
or
b) sale in the ordinary
course of business b) sale in the ordinary
course of business.
 Investment Property
PFRS for Small PFRS for SME PFRS
Entities

Cost
Initial including borrowing costs
Measurement Cost Cost directly attributable to the
acquisition, construction or
production of a qualifying asset

FV
Subsequent If can be measured
Measurement Cost or FV Cost or FV
reliably without
undue cost or effort

Fair value
cannot be Account as PPE
measured N/A N/A
at cost
reliably
 Investment Property
Subsequent Measurement of Investment Properties
► Assume the following for illustration purposes:

On November 10, 20x8, Entity A purchased a parcel of land, to be held for

lease, and incurred the following cost. The purchase was made on account:

Amounts in ₱
Total purchase price (sum of all installment payments) 1,500,000
Present value of installment payments 1,200,000
Transfer tax 20,000
Brokers fee 10,000

Question 1 How much should Entity A capitalize as investment property on November 10,
20x8?

Question 2 How much is the value of the investment property as of reporting date, i.e.,
December 31, 20x8?
 Investment Property
Subsequent Measurement of Investment Properties

► Question 1 How much should Entity A capitalize as investment property on

November 10, 20x8?

q Answer: ₱1,230,000

► Question 2 How much is the value of the investment property as of

December 31, 20x8?

q Answer: It depends on the Entity A’s accounting policy.

q Cost method – ₱1,230,000

q Fair value method – Based on the fair value as of December 31, 20x8,
changes in fair value shall be recognized in profit or loss
 Property and Equipment
PFRS for Small
PFRS for SME PFRS
Entities
Subsequent measurement options

Cost model1

Fair value model2

Revaluation model3

Changes in fair value

Fair value model1 P&L N/A N/A
Revaluation model2 N/A OCI OCI
Impairment losses P&L P&L P&L
1Cost model - cost less accumulated depreciation less impairment losses
2Fairvalue model - fair value at each reporting date
3Revaluation model - revalued amount less accumulated depreciation less impairment losses
 Borrowing Costs
PFRS for Small Entities PFRS for SME PFRS

Measurement

Must all be expensed as Must all be expensed Can be capitalized if

incurred as incurred directly attributable
to the acquisition,
construction or
production of a
qualifying asset
Employee Benefits
 Employee Benefits
PFRS for Small Entities PFRS for SME PFRS

Definition

Defined benefit Defined benefit

Accrual Approach
Projected Unit Credit Method

• Liability is based Projected Unit

Simplified Approach
on Current Salary Credit Method
Ignore estimated future salary
and Years of
•
increase rates
Service • Ignore future service of current
employees
• Ignore possible in-service
• Does not mortality of current employees
consider future
changes in P/L or OCI
salary rates and
service periods

Defined contribution Defined contribution

Provisions for discounting
 Employee Benefits
Measurement of post employment benefit
► Assume the following for illustration purposes:

On December 31, 20x8, Entity A has 15 employees, which includes

Employee B. The details of Employee B is as follows:
Monthly rate ₱15,000
Equivalent half month salary per RA 7641 (22.5 days) ₱13,500
Estimated half month salary rate at estimated year of
retirement (22.5 days) [includes future salary increase] ₱23,000
Present value as of December 31, 20x8 of the estimated half
monthly salary rate at year of retirement ₱18,000
Years of service as of December 31, 20x8 5
Remaining years of service up to retirement 15

► Question What is the amount of pension liability to be recognized for

Employee B as of December 31, 20x8?

► Answer: ₱67,500 [₱13,500 x 5 years]

Income Taxes
 Income Taxes
PFRS for Small Entities PFRS for SME PFRS

Policy choice using either:

Deferred
Taxes Payable
Income Tax
Method
Method

Current Current

Deferred Deferred
 Income Taxes
Measurement of provision for income tax
► Assume the following for illustration purposes:

The statutory corporate income tax rate applicable to Entity A in 20x8 is

30%. Investment property is assumed to be an ordinary asset. All deductible
temporary differences are assessed to be recoverable. The reconciliation of
net income before income tax and taxable income for the year ended
December 31, 20x8 of Entity A is as follows:

Net income before income tax ₱1,000,000

Reconciling items:
Change in fair value of investment property (100,000)
Change in fair value of investment in listed equity instruments (50,000)
Provision for impairment of inventories 20,000
Interest income subject to final tax (15,000)
Taxable income ₱855,000

► Question 1 What is the provision for current income tax of Entity A?

► Question 2 What is the provision for deferred income tax of Entity A if:
a. Entity A applies taxes payable method
b. Entity A applies deferred income taxes method
 Income Taxes
Measurement of provision for income tax

► Question 1 What is the provision for current income tax of Entity A?

► Answer: ₱256,500

Taxable income ₱855,000

Multiply by tax rate 30%
Provision for current income tax ₱256,500
 Income Taxes
Measurement of provision for income tax

► Question 2 What is the provision for deferred income tax of Entity A?

► Answer:

a. zero [All differences are treated as permanent differences]

b. ₱24,000

Change in fair value of investment property (₱100,000)

Provision for impairment of inventories 20,000
Net temporary taxable income (80,000)
Income tax rate 30%
Provision for deferred income tax ₱24,000
Leases
 Leases
PFRS for Small Entities PFRS for SME PFRS
No concept of Leases are classified Same with PFRS for
finance lease as operating or SME but, lessees
finance should apply single
model to all leases

No requirement to Lease expense or Right-of-use asset

recognize lease on a income on a straight- with some
straight-line basis line basis exemptions

Lease income or
expense is recognized
in the profit or loss in
the period in which
they are earned or
incurred
 Leases
Measurement of leases

► Assume the following information for illustration purposes:

Entity A entered into a 5 year lease agreement, as a lessor, with 5%

annual escalation. The present value of minimum lease receipts at the
inception of the lease is ₱497,000. Annual lease receipts is as follows:

Amounts in ₱
Year 1 100,000
Year 2 105,000
Year 3 110,250
Year 4 115,763
Year 5 121,551

► Question What is the amount of rent income that Entity A should

recognize in Year 1 to Year 5 under PFRS for SE?
 Leases
Measurement of leases

► Assume the following information for illustration purposes:

Answer: rent income shall be measured as earned, as follows:

Amounts in ₱
Year 1 100,000
Year 2 105,000
Year 3 110,250
Year 4 115,763
Year 5 121,551

Under PFRS for Small Entities, there’s no concept of finance lease or straight line
recognition of leases.
Basic Financial Instruments
 Basic Financial Instruments
PFRS for Small
PFRS for SME PFRS
Entities

Accounting policy choice

No accounting Provisions of Provisions of

policy choice Section 11 and 12 PFRS 9
available in under PAS 39
accounting for
basic financial
instruments
 Basic Financial Instruments
PFRS for Small Entities PFRS for SME PFRS

Initial measurement

Transaction Price including Same Same (except financial asset or

transaction cost. liability at fair value through
profit or loss) but, subject to
PFRS 9 para. 5.1.2A

If the arrangement constitutes Same

a financing transaction, at the
present value of the future
payments discounted at a
market rate of interest for a
similar debt instrument

Investments in non-convertible
preference shares and non-
puttable ordinary or preference
shares that are required or
permitted to be measured at
FVPL.
 Basic Financial Instruments
Debt Amortized cost
Instruments
PFRS for

Entities
Small
Publicly Traded or
FV can be measured Lower of Cost or
reliably Fair Value
Equity
Instruments Not publicly Cost less
traded impairment

Debt Amortized cost

PFRS for

Instruments
Publicly Traded or
SME

FV can be measured
reliably Fair Value
Equity
Instruments Not publicly traded/
Cost less
All other
investments impairment
 Basic Financial Instruments
Debt Derivatives Equity

Contractual cash flow characteristics test (at instrument level)

Business model test

PFRS

(at an aggregate level) Neither

Held for trading?
(A) nor (B)
A Hold-to- B BM with
collect objective that
contractual results in
cash flows collecting
contractual cash FVOCI
flows and selling
financial assets option
elected?
Conditional fair value option elected?

Amortized FVOCI FVOCI

FVPL
cost (with recycling) (no recycling)
Transition to the Framework
 Transition to the Framework
First-time adoption

• An entity’s first financial statements that conform to

this Framework are the first annual financial statements
in which the entity makes an explicit and unreserved
statement in those financial statements of
compliance with this Framework.

• An entity’s date of transition to this Framework is the

beginning of the earliest period for which the entity
presents full comparative information in accordance
with this Framework.
 Transition to the Framework
Procedures for preparing financial statements at the
date of transition (Cont.)

► The accounting policies that an entity uses in its opening

statement of financial position under this Framework may
differ from those that it used for the same date using its
previous financial reporting framework. The resulting
adjustments arise from transactions, other events or
conditions before the date of transition to this Framework.
Therefore, an entity shall recognize those adjustments
directly in retained earnings (or, if appropriate, another
category of equity) at the date of transition to this Framework.
 Transition to the Framework
Transition date

► January 1, 2019

► Early application is permitted

Thank you!