Financial Accounting and Reporting

COVID – 19 PROJECT FOR ACCOUNTANTS

FINANCIAL ACCOUNTING AND REPORTING

SMALL AND MEDIUM-SIZED ENTITIES

IASB Definition SEC Definition

a. Entities that Do not have public accountability, a. With total assets between P3,000,000 and
and P350,000,000, OR with total liabilities between
P3,000,000 and P250,000,000.
b. Publish general purpose financial reports for
external users. b. That is not required to file financial statements
under SRC Rule 68.1. This SRC Rule 68.1 pertains
to “listed entities” whose shares are traded in a
public market.

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 a 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.

e. That is not a public utility.

What is Public Accountability?

An entity has public accountability if:
a. Its debt or equity instruments are traded in a public market or it is in the process of issuing such
instruments for trading in public market, for example, domestic or foreign stock exchange, over-the-counter
market, local and regional market.

b. It holds assets in fiduciary capacity for a broad group of outsiders as one of its primary businesses.

This is typically the case for banks, credit unions, insurance companies, securities dealers or brokers,
mutual funds and investment banks.

However, if such entities do so for reasons incidental to a primary business the entities are “not publicly
accountable”

SMALL ENTITIES
a. The Securities and Exchange Commission in its meeting held on March 22, 2018, approved the adoption of
the Philippine Financial Reporting Standards for Small Entities as part of the SEC’s rules and
regulations on financial reporting and in line with the corporate regulator’s Ease of Doing Business
initiatives. Prior to this, the PFRS for Small entities was approved by the Financial Reporting Standards
Council on December 31, 2017 and by the Board of Accountancy with the PRC on February 20, 2018 to be
fully implemented by Small entities beginning on or after January 1, 2019. However, earlier adoption is
permitted.

b. Small Entities have assets of between P3,000,000 to P100,000,000 or total liabilities between P3,000,000
to P100,000,000. If the entity is a parent company, the said amounts shall be based on the consolidated
figures. Small entities are also not required to file financial statements under Part II of SRC Rule 68, are not
in the process of filing their financial statements for the purpose of issuing any class of instruments in the
public market and are not holders of secondary licenses issued by regulatory agencies.

c. As a rule, entities with total assets of more than P100,000,000 to P350,000,000 or liabilities of more than
P100,000,000 to PP250,000,000 are now known as “Medium-Sized Entities” and shall still apply PFRS for
SMEs.

d. Some of the key simplifications introduced by the PFRS for Small Entities are as follows:
• Inventories are to be subsequently valued at the lower of cost and market value. Full PFRS and
PFRS for SMEs both use LCNRV

• Investment properties can be carried either at cost or at fair value, depending on the policy choice
made by the entity. Full PFRS and PFRS for SMEs use the fair value method as its preferred
method.

• There is no concept of "finance lease". All lease receipts (payments) are recognized as income
(expense) as earned (incurred).

• There is no accounting for onerous contracts. Obligations under onerous contracts are recognized as
a provision under full PFRS.

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Financial Accounting and Reporting
• For equity-settled share-based payment transactions, an entity shall measure the goods or services
received, and the corresponding increase in equity, with reference to the net asset value of the equity
instruments granted. Net asset value is derived by dividing the total assets of the entity less any
liabilities, by the number of shares outstanding at measurement date. Full PFRS and PFRS for SMEs
use the fair value at grant date.

• For defined benefit plans, an entity is required to use the accrual approach in calculating benefit
obligations in accordance with Republic Act (RA) 7641, The Philippine Retirement Pay Law, or
company policy (if superior than RA 7641). Accrual approach is applied by calculating the expected
liability as of reporting date using the current salary of the entitled employees and the employees'
years of service, without consideration of future changes in salary rates and service periods
.
• Entities are given a policy choice of not recognizing deferred taxes in the financial statements. There
is no option for Full PFRS and PFRS for SMEs.

• Biological assets can be carried either at cost or at current market price, depending on the policy
choice made by the entity. The fair value less cost of disposal is not used

• Prior period adjustments are just captured in the opening balance of the current year, but with
appropriate disclosures.

Micro-business entities
Micro-business entities are entities whose total assets or total liabilities are below the P3,000,000 floor
threshold. Micro-business entities have the option to use any of the following bases of accounting in the
preparation of financial statements:
a. Full PFRS
b. PFRS for Small Entities
c. Income Tax Basis

Exemptions from PFRS for SMEs

The Philippine SEC on October 7, 2010 resolved to exempt from the mandatory adoption of PFRS for SMEs small
and medium-sized entity that meets any of the following criteria:

1. It is subsidiary of a parent company reporting under full PFRS.

2. It is a subsidiary of a foreign parent company that will be moving towards 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 nonpublicly
accountable entity for local reporting purposes, 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
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 entity’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.

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.

Significant and continuing

If an SME that uses the PFRS for SMEs in a current year breaches the floor and ceiling size criteria at the end of the
current year, the entity shall be required to transition to full PFRS in the next year if the ceiling threshold is breached
or another acceptable accounting basis if the floor threshold is breached.

This transition must be made provided the event that caused the change is considered “significant and continuing”.
As a general rule, a 20% breach or more of total assets or total liabilities would be considered significant.

This same criteria or requirement shall also be applied to Small Entities.

Effective date

An entity that meets the definition of SME shall apply the PFRS for SMEs for annual period beginning January 1,
2010. The amount of total assets and liabilities shall be based on the audited financial statements on December 31,
2009. An SME whose accounting period begins on a date other than January 1, 2010 shall apply the size criteria
using the audited financial statements for the immediately preceding fiscal year.

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Financial Accounting and Reporting
Transition to PFRS for SMEs

A first-time adopter of the PFRS for SMEs is an entity that presents its first annual financial statements that conform
with the PFRS for SMEs regardless of whether its previous accounting framework was full PFRS or another set of
generally accepted accounting principles.

First-time adoption requires full retrospective application of the PFRS for SMEs effective at the reporting date for an
entity’s first annual financial statements that conform with PFRS for SMEs.

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 the PFRS for SMEs in its first annual financial statements that conform to
PFRS for SMEs.

Thus, if the first-time adopter presents its first annual financial statements in conformity with the PFRS for SMEs on
December 31, 2013 on comparative basis, the date of transition to PFRS for SMEs is January 1, 2012.

Opening statement of financial position

The opening statement of financial position is the statement of financial position as of the date of transition to the
PFRS for SMEs. In its opening 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 its previous accounting framework as one type of asset, liability or
component of equity, but a different type of asset, liability or equity under the PFRS for SMEs.
d. Apply the PFRS for SMEs in measuring all recognized assets and liabilities.

The resulting adjustments arising from transactions, other events and conditions before the date of transition to PFRS
for SMEs shall be recognized directly in retained earnings or another category of equity, if appropriate.

COMPARATIVE DIFFERENCES BETWEEN PFRS FOR SMEs AND FULL PFRS

Qualitative characteristics of the financial statements

SME Full PFRS

1. Understandability 1. Relevance
2. Relevance 2. Faithful representation
3. Materiality 3. Understandability
4. Reliability 4. Comparability
5. Substance over form 5. Verifiability
6. Prudence 6. Timeliness
7. Completeness
8. Comparability
9. Timeliness
10. Balance between benefit and cost

Measurement of Elements

SME Full PFRS

1. Historical cost 1. Historical cost

2. Fair value 2. Current cost
3. Realizable value
4. Present value

Components of Financial Statements

SME Full PFRS

When the only changes to the equity are a A statement of changes in equity is always
result of profit or loss, payment of dividends, required. A single statement of income and
prior periods errors, changes in accounting retained earnings is prohibited under Full
policy, a “ single statement of income and PFRS
retained earnings” can be presented by SMEs
instead of both a statement of comprehensive
income and statement of changes in equity.

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Statement of Financial Position

SME Full PFRS

1. Presentation of both investments in 1. Total of assets classified as held for sale.

associates and investments in joint 2. Total of liabilities included in disposal group
ventures as separate line items classified as held for sale.
2. Third statement of financial position is not 3. Presentation of investments in associates
required but not investment in joint ventures
4. a third statement of financial position as at
the beginning of the earliest comparative
period shall be prepared:
a. When an entity applies an
accounting retrospectively.
b. When an entity makes a
retrospective restatement.
c. When an entity reclassifies items in
its financial statements

Other of Comprehensive Income

SME Full PFRS

a. Gain or loss from translating the financial
statements of a foreign operation.
b. Actuarial gain and loss
c. Change in fair value of hedging instrument
that was effective in offsetting the change in
the fair value or expected cash flows of the
hedge item.
d. Revaluation surplus during the year on
Property, Plant and Equipment only
a. Gain or loss from translating the financial
statements of a foreign operation
b. Remeasurements of defined benefit plans
c. The effective portion of unrealized gain or loss
on hedging instruments designated as cash
flow hedge
d. Unrealized gain as loss on equity instruments
measured at fair value through other
comprehensive income
e. Revaluation surplus during the year
f. For particular liabilities designated as at fair
value through profit or loss, the amount
of change in fair value that is attributable to
change in the liability’s credit risk.

Inventories

SME Full PFRS

a. Inventories are measured at the lower of Inventories are measured at LCNRV. If

cost and estimated selling price less cost the NRV is lower than cost, the write-
to complete and sell. down is recognized as component of
b. If the estimated selling price less cost to cost of goods sold
complete and sell is lower than cost, the
write-down is recognized as impairment
loss

Basic Financial Instruments of SMEs

1. Cash, demand and fixed term deposits or bank accounts

2. Trade accounts and notes receivable and loans receivable
3. Commercial papers or commercial bills
4. Investments in nonputtable ordinary shares
5. Investments in nonconvertible and nonputtable preference shares
6. Commitment to receive a loan if the commitment “cannot be net settled” in cash
7. Accounts payable in local and foreign currency
8. Loans from bank and other third parties
9. Bonds and similar debt instrument
10. Loans to or from subsidiaries or associates that are due on demand.

The investment in ordinary shares and nonconvertible preference shares is nonputtable if:

a. When the entity does not have an option to sell the shares back to the issuer for cash.
b. When there is no arrangement that could result in the shares being automatically sold or
returned to the issuer because of a future event.

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Conditions for a debt instrument to be classified as basic financial instrument
a. Returns to the holder are a fixed amount or a variable amount that throughout the life of the instrument is
equal to a single fixed amount.
b. No contractual provisions that could result in the holder losing the principal amount and interest.
c. Contractual provisions that permit the debtor to prepay the instrument are not contingent on future
events.
d. The payment or repayment of principal and interest must be unconditional.

A debt investment is basic when the returns are fixed and unconditional.

Initial Measurement of Basic Financial Instruments

The PFRS for SMEs provides that basic financial instruments are initially measured at the transaction price,
including transaction costs.

However, if the instrument is measured at fair value through profit or loss, the transaction cost is expensed
immediately.

Subsequent Measurement of Basic Financial Instruments

The PFRS for SMEs provides that basic financial instruments are subsequently measured at amortized cost, cost
less impairment and fair value through profit or loss depending on the instruments.

a. Basic debt instruments are measured at amortized cost using the effective interest method.
b. Commitments to receive a loan are measured at cost less impairment.

c. Investments in nonputtable ordinary shares and investments in nonconvertible and nonputtable preference
shares are measured at fair value through profit or loss if the shares are publicly traded, or if the fair
value can be measured reliably.

If the shares are not publicly traded or if the fair value cannot be measured reliably, such investments are
measured at cost less impairment.

7. Impairment of Basic Financial Instruments

The PFRS for SMEs provides that for a basic financial instrument measured at cost less impairment, the
impairment loss is the difference between the carrying amount of the asset and the best estimate of the amount
that would be received if the asset were sold.

Under full PFRS, the impairment loss is the difference between the carrying amount and the present value of
estimated future cash flows discounted at market rate of interest for similar asset.

8. Non-Basic Financial Instruments of SMEs

a. Asset-backed securities, such collateralized mortgage obligations, repurchase agreements and securitized
packages of receivables
b. Derivative contracts
c. Hedging instruments
d. Commitments to make a loan to another entity
e. Commitments to receive a loan if the commitment can be net settled in cash

The following instruments are not also basic financial instruments:

a. Investments in subsidiaries, associates and joint ventures

b. Financial instruments that meet the definition of an entity’s own equity.
c. Leases
d. Employers’ rights and obligations under employee benefit plans

Investments in Associates and Joint Ventures

SME Full PFRS

Investments in associates or joint ventures Investments in associates and

using the cost model, the equity method investments in joint ventures are
or fair value model and using the same accounted for using the equity method.
accounting policy for all investments in
associates.

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Financial Accounting and Reporting
Cost model - initially measured at the transaction price including transaction cost. Subsequently, the investor
shall measure its investment in associate at cost less any accumulated impairment losses. However, the cost
model is not permitted if the investment in associate has a published price quotation in which case, the fair
value model is used. All dividends and other distributions received are recognized as income without regard
whether the dividends are from preacquisition or post-acquisition retained earnings of the associate.

Equity method - initially recognized at the transaction price, including transaction cost. Subsequently, the
investment is adjusted to reflect the investor’s share in profit or loss and other comprehensive income of the
associate. Dividends and other distributions received from the associate are recognized as reduction of the
carrying amount of the investment.

Fair value model - initially measured at the transaction price, excluding transaction cost. At each reporting
date, the investment is measured at fair value with changes in fair value recognized in profit or loss. If the fair
value model is used, the investment in associate as not tested for impairment.

Investment Property

SME Full PFRS

Measured at fair value if the fair value can
be measured reliably without undue cost or
effort on an ongoing basis. Otherwise, the
cost model is used and the investment
property and presented as a separate line
item in the statement of financial
position.
Investment property is measured at either
cost or fair value. Only one measurement
method shall be applied to all investment
property. The fair value method shall be
used as a preferred method.

Government Grant

SME Full PFRS

a. A government grant is recognized when a. A government is recognized when there is

the conditions are actually satisfied.
b. Does not allow an entity to match the
grant with the expense for which it is
intended to compensate or the cost of the
asset that it is used to finance
c. The grant is a deferred income until the
conditions are actually satisfied
a reasonable assurance that the entity will
comply with the specified conditions
b. A government grant is recognized as
income over the periods necessary to
match them with the related costs for
which they are intended to compensate
c. Grants related to asset may be treated
either as deferred income or a reduction in
the carrying amount of the asset

Borrowing Costs

SME Full PFRS

All borrowing costs are expensed Borrowing costs that are directly
immediately when incurred. There is no attributable to the acquisition, construction
capitalization for borrowing cost regardless or production of a qualifying asset must be
of use for the loan. capitalized as part of the cost of the asset.
All other borrowing costs are expensed.

Impairment of Assets

SME Full PFRS

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

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Financial Accounting and Reporting

Intangible Assets

SME Full PFRS

a. Intangible assets are measured a. Intangible assets are measured

subsequently using the cost model subsequently using either the cost model
only or revaluation model
b. If the useful life of an intangible asset b. The useful life of an intangible asset is
cannot be estimated reliably, it is considered to be finite. The useful life of
assumed to be 10 years. All an intangible asset is either finite or
intangibles assets, including goodwill, indefinite. If the useful life cannot be
are amortized estimated reliably, there is no
assumption of 10 years
c. Intangible assets with a finite useful life
are amortized over the useful life and
intangible assets with indefinite useful life
are not amortized but tested for impairment

Research and Development Costs

SME Full PFRS

All research and development costs are
expensed immediately when incurred
Research costs are expensed immediately
when incurred. However, development costs
may be capitalized when specific criteria are
met, particularly when technological feasibility
has already been established.

Defined Benefit Liability

SME Full PFRS

Actuarial gains and losses are fully Actuarial gains and losses are recognized
recognized either in profit or loss or other fully in other comprehensive income
comprehensive income.

Deferred Tax Asset

SME Full PFRS

A valuation allowance is recognized for a The concept of valuation allowance is not

tax asset so that its carrying amount equals
the highest amount that is more likely than
not to be recovered.
applicable. Instead, a deferred tax asset is
only recognized to the extent that it is
probable that there will be sufficient future
taxable profit against which the deferred tax
asset can be used.

Share-Based Payment

SME Full PFRS

The share options must be measured at
fair value on the date of grant. The intrinsic
value is not mentioned as an alternative.
The share options shall be measured at fair
value on the date of grant. However, if the fair
value of the share options cannot be
measured reliably, the intrinsic value of the
share options is used. The intrinsic value is
the excess of the market price of the share
over the option price

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Financial Accounting and Reporting

Extractive Industry

SME Full PFRS

An exploration expenditure may be a. If an entity’s accounting policy results in

classified as tangible asset or intangible the recognition of an exploration and
asset and shall be measured using the evaluation asset, such asset shall be
cost model only measured initially at cost.
b. The exploration and evaluation asset
may be classified as tangible asset or
intangible asset and shall be measured
subsequently using either the cost
model or fair value model.

Business Combination

SME Full PFRS

Transaction costs are included in cost of Transaction costs are excluded from the cost
business combination. Contingent of business combination. Contingent
consideration is included as part of cost of consideration is recognized regardless of the
business combination if it is probable and probability of payments
can be measured reliably

Consolidated Financial Statements

SME Full PFRS

A parent need not present consolidated A parent need not present consolidated
financial statements if: financial statements if:

a. The parent is itself a subsidiary and its
ultimate parent or any intermediate
parent produces consolidated financial
statements that comply with full PFRS
or PFRS for SMEs.
b. The parent has no subsidiaries other
than one which was acquired with the
intention of selling or disposing of it
within one year.
a. The parent is itself a wholly-owned
subsidiary or partially-owned subsidiary
and its other owners do not object to the
parent not presenting consolidated
financial statements.
b. The parent’s debt and equity instruments
are not traded in a public market.
c. The parent did not file or is not in the
process of filing its financial statements
with a regulatory organization for the
purpose of issuing any class of
instruments in a public market.
d. The ultimate or any intermediate parent
produces consolidated financial
statements that comply with PFRS.

Special purpose entity – This is an entity created to accomplish a narrow and well-defined objective such as to
effect a lease, to undertake R and D activities or to securitize financial assets. An entity consolidates an SPE when
the substance of the relationship between the entity and the SPE indicates that the SPE is controlled by the entity.

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Financial Accounting and Reporting
PROBLEM SOLVING
1. An SME sold goods with a list price of P1,000,000 to a customer on normal credit terms of
30 days interest-free credit. Ten days after the sale, the customer paid the entity P690,000
in full as final settlement of a debt that arose from the sale of the goods. The amount
received from the customer included P50,000 of value added tax collected by the entity on
behalf of the national government. The settlement amount is net of a P200,000 trade
discount, P100,000 volume rebate and P10,000 prompt settlement discount.

At what amount should the entity measure the revenue from the sale of the goods?
A. 1,000,000
B. 700,000
C. 690,000
D. 640,000

2. During 2019, an SME is the defendant in a breach of patent lawsuit. Its lawyers believe
there is an 80% chance that the court will not dismiss the case and the entity will incur an
outflow of benefits. If the court rules in favor of the claimant, the lawyers believe that there
is a 60% chance that the entity will be required to pay damages of P2,000,000 and a 40%
chance that the entity will be required to pay damages of P1,000,000. The court is expected
to rule late in December 2020. There is no indication that the claimant will settle out of the
court. A 7% risk adjustment factor to the cash flows is considered appropriate to reflect the
uncertainties in the cash flow estimates. An appropriate discount rate is 10% per year. The
present value of 1 at 10% for 1 period is 0.91.

What is the measurement of the provision on December 31, 2019?

A. 1,500,000
B. 1,369,600
C. 1,280,000
D. 1,246,336

Use the following to answer the next three questions

On January 1, 2019, SME acquired 25% of the equity of each of entities A and B for P1,000,000
and P3,000,000 respectively. Transaction costs of 10% of the purchase price of the shares were
incurred by SME. On January 2, 2019, entity A declared and paid dividend of P800,000. For the
year ended December 31, 2019, entity A recognized profit of P1,000,000. However, entity B
recognized a loss of P2,000,000 for that year. Published price quotations do not exist for the
shares of entities A and B. Using appropriate valuation techniques SME determined the fair
value of its investments in entities A and B on December 31, 2019 at P1,500,000 and
P2,000,000 respectively. Costs of disposal are estimated at 10% of the fair value of the
investments.

3. Under the cost model, what is the total carrying amount of the investments in associates on
December 31, 2019?
A. 4,400,000
B. 4,000,000
C. 2,900,000
D. 2,800,000

4. Under the equity method, what is the total carrying amount of the investments in associates
on December 31, 2019?
A. 3,950,000
B. 3,650,000
C. 3,500,000
D. 2,950,000

5. Under the fair value model, what is the total carrying amount of the investments in
associates on December 31, 2019?
A. 4,000,000
B. 3,500,000
C. 3,100,000
D. 3,150,000

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Financial Accounting and Reporting
Use the following to answer the next four questions
An SME provided the following adjusted balances on December 31, 2019:
Cash P 200,000
Cash equivalent 30,000
Noncontrolling interest’s share of profit for the year 120,000
Dividends declared by SME 100,000
Accounts receivable 1,900,000
Inventory, at cost 1,000,000
Inventory, at fair value less costs to complete and sell 180,000
Investment property, at fair value 2,500,000
Property, plant and equipment, at cost 4,970,000
Long-term debt (P500,000 due on 1 January each year) 2,300,000
Interest accrued on long-term debt (due in less than 12 months) 230,000
Share capital 1,500,000
Retained earnings at the beginning of the year 1,910,000
Profit for the year 1,000,000
Noncontrolling interest 730,000
Accumulated depreciation on property, plant and equipment 1,450,000
Allowance for doubtful accounts 200,000
Trade payables 250,000
Accrued expenses 200,000
Warranty provision (expires 12 months after the date of sale) 400,000
Environmental restoration provision (restoration is expected to
take place in 2020) 80,000
Provision for vacation leave (unused leave expires 12 months after the
year in which it accrues) 450,000
Dividends payable 100,000
Bank loan fully repayable in 2022 and prepayable without penalty 200,000

6. What is the total amount of current assets?

A. 5,610,000
B. 3,310,000
C. 3,110,000
D. 3,210,000

7. What is the total amount of current liabilities?

A. 2,410,000
B. 1,400,000
C. 2,130,000
D. 1,900,000

8. What is the balance of retained earnings on December 31, 2019?

A. 2,810,000
B. 2,910,000
C. 2,690,000
D. 2,810,000

9. What is the equity attributable to owners of the parent?

A. 4,920,000
B. 4,310,000
C. 4,190,000
D. 1,500,000

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Financial Accounting and Reporting
Use the following to answer the next two questions
An SME prepared the following post-closing trial balance on December 31, 2019:
Property, plant and equipment P 2,300,000
Intangibles assets 850,000
Investment in associate 1,100,000
Deferred tax asset 40,000
Inventory 500,000
Trade receivables 600,000
Cash on hand 1,150,000
Investment in nonputtable ordinary shares – listed 550,000
Investment in nonconvertible nonputtable preference shares – unlisted 500,000
Investment in term bonds 400,000
Demand deposit in bank 200,000
Loan receivable from employee – fixed term 10,000
Loan receivable from associate – on demand 300,000
Bank loans 1,100,000
Other long-term employee benefits 250,000
Obligations under finance leases 400,000
Trade payables 550,000
Warranty obligation 20,000
Rent payable 10,000
Interest payable 20,000
Current tax liability 210,000
Bank overdraft-on demand 40,000
Share capital 4,000,000
Retained earnings 1,900,000

10. What is the total amount of basic financial assets?

A. 4,810,000
B. 3,750,000
C. 3,710,000
D. 3,160,000

11. What is the total amount of basic financial liabilities?

A. 2,330,000
B. 2,120,000
C. 1,930,000
D. 1,720,000

12. On January 1, 2019, an SME acquired a building for P10,450,000 including P500,000
nonrefundable purchase taxes. The purchase agreement provided for payment to be made
in full on December 31, 2019. Legal fees of P220,000 were incurred in acquiring the building
and paid on January 1, 2019. The building is held to earn lease rentals and for capital
appreciation. An appropriate discount rate is 10%. What is the initial cost of the investment
property?
A. 10,170,000
B. 9,720,000
C. 9,700,000
D. 9,500,000

13. On January 1, 2019, an SME acquired a building to be held as investment property for
P5,000,000. The fair value of the investment property cannot be measured reliably without
undue cost or effort on an ongoing basis. On December 31, 2019, management assessed
the building’s useful life at 50 years. At year-end, the entity declined an unsolicited offer to
purchase the building for P6,500,000. This is a one-time offer that is unlikely to be repeated
in the foreseeable future. What is the carrying amount of the investment property on
December 31, 2019?
A. 6,500,000
B. 6,370,000
C. 5,000,000
D. 4,900,000

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Use the following to answer the next four questions
An SME incurred and paid the following expenditures in acquiring an administration building and
the land on which it is built during 2019:
January 1 20% of the price is attributable to land P 50,000,000
January 1 Nonrefundable transfer taxes not included in the
P50,000,000 purchase price 1,000,000
January 1 Legal cost directly attributable to the acquisition 200,000
January 1 Reimbursing the previous owner for prepaying the
nonrefundable local government property taxes for the
six-month period ending June 30, 2019 100,000
June 30 Nonrefundable annual local government property
taxes for the year ending June 30, 2020 200,000
During 2019 Day -to-day repairs and maintenance 250,000

On December 31, 2019, SME assessed that the useful life of the building is 40 years with
residual value of P2,000,000. On same date, the fair value less cost of disposal of the land and
building is P60,000,000.

14. What is the initial carrying amount of the land?

A. 10,240,000
B. 10,200,000
C. 10,040,000
D. 10,000,000

15. What is the initial carrying amount of the building?

A. 48,000,000
B. 40,960,000
C. 40,800,000
D. 40,000,000

16. What is the depreciation of the building?

A. 1,024,000
B. 1,000,000
C. 974,000
D. 950,000

17. What is the carrying amount of the building on December 31, 2019?
A. 48,000,000
B. 39,986,000
C. 38,960,000
D. 39,936,000

THEORETICAL CONCEPTS
1. The IASB defines SMEs as entities that
A. Do not have public accountability.
B. Have public accountability and publish general purpose financial statements for external
users.
C. Do not publish general purpose financial statements for external users.
D. Do not have public accountability and publish general purpose financial statements for
external users.

2. An entity has public accountability under all of the following, except

A. Its debt and equity instruments are traded in a public market
B. It is in the process of issuing debt and equity instruments for trading in a public market.
C. It holds assets in fiduciary capacity for a broad group of outsiders as one of its primary
businesses.
D. It holds assets in fiduciary capacity for a broad group of outsiders for reasons incidental
to a primary business.

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3. All of the following entities are publicly accountable, except
A. An entity whose shares are traded in a public market.
B. An entity whose debt instruments but not its shares are traded in a public market.
C. An entity whose shares and debt instruments are traded in an “over-the-counter market”.
D. An entity that is not in the process of issuing its shares and debt instruments for trading
in a public market.

4. In the Philippines as defined by the SEC, which of the following entities is not an SME?
A. A nonpublicly accountable entity with total assets between P3,000,000 and
P350,000,000 OR total liabilities between P3,000,000 and P250,000,000.
B. An entity that is not in the process of filing its financial statements for the purpose of
issuing any class of instruments in a public market.
C. An entity that is not a holder of a secondary license issued by a regulatory agency.
D. An electric distribution company like Meralco.

5. Which can be considered an SME?

A. A credit union with total assets of P3,000,000.
B. A broker with total liabilities of P3,000,000.
C. A bank with total assets of P350,000,000.
D. An unlisted entity manufacturing electrical goods with total liabilities of P250,000,000.

6. Entities with total assets or total liabilities below the floor threshold of P3,000,000 are known
as
A. Micro-business entities
B. Macro-business entities
C. Medium-sized entities
D. Small entities

7. Micro-business entities can use which of the following bases of accounting?

A. Full PFRS
B. PFRS for SMEs
C. Another acceptable basis of accounting
D. Any one of the above

8. All of the following SMEs are exempted from the mandatory adoption of the PFRS for SMEs,
except
A. Subsidiary of a parent entity reporting under full PFRS.
B. Branch office of a foreign entity reporting under full IFRS.
C. Subsidiary that is mandated to report under full PFRS.
D. An entity with concrete plans to conduct an initial public offering within the next five
years.

9. What is the effectivity of the PFRS for SMEs?

A. January 1, 2010
B. July 1, 2010
C. January 1, 2011
D. January 1, 2012

10. If an SME that uses the PFRS for SMEs in the current year breaches the ceiling of the size
criteria at the end of the current year, the entity is
A. Required to transition to full PFRS at the current year-end.
B. Required to transition to full PFRS at the current year-end if the event that caused the
change is significant and continuing.
C. Required to transition to full PFRS in the next year if the event that caused the change is
significant and continuing
D. Not required to transition to full PFRS.

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11. As a general rule, what is considered “significant” change in the size criteria that requires
transition to or from the PFRS for SMEs?
A. 50% or more of the total assets or total liabilities
B. 20% or more of the total assets or total liabilities
C. 10% or more of the total assets or total liabilities
D. No quantitative threshold can be made.

12. An SME that presents its first financial statements that conform with PFRS for SMEs is
known as
A. An originating entity
B. A provisional presenter
C. A first-time adopter
D. An initial reporter

13. The statement of financial position of an SME at the date of transition to PFRS for SMEs is
the
A. Provisional statement of financial position
B. Closing statement of financial position
C. Opening statement of financial position
D. Originating statement of financial position

14. Which of the following statements best describes the date of transition to PFRS for
SMEs?
A. The beginning of the latest period presented in the entity's most recent annual financial
statements under previous accounting framework
B. The end of the latest period presented in the entity's most recent annual financial
statements under previous accounting framework
C. The beginning of the earliest period for which an entity presents full comparative
information under PFRS for SMEs in its first financial statements that conform with
PFRS for SMEs
D. The end of the earliest period for which an entity presents full comparative information
under PFRS for SMEs in its first financial statements that conform with PFRS for SMEs

15. In which of the following situations can a nonpublicly accountable entity claim compliance
with PFRS for SMEs in its financial statements?
I. The entity prepares the financial statements in accordance with local tax requirements
that are substantially the same as the PFRS for SMEs.
II. The entity prepares the financial statements in accordance with local tax requirements
that are, except in name, word for word the same as the PFRS for SMEs.
III. The entity prepares the financial statements in accordance with PFRS for SMEs.
IV. The entity prepares the financial statements in accordance with full PFRS.
A. I and III only
B. II and III only
C. II, III and IV only
D. III and IV only

16. Fair presentation, in accordance with the PFRS for SMEs, is presumed to result from
A. Compliance with the PFRS for SMEs by an entity that has public accountability.
B. Compliance with the PFRS for SMEs, with additional disclosures where necessary, by
an entity that has public accountability.
C. Compliance with the PFRS for SMEs by an entity that does not have public
accountability.
D. Compliance with the PFRS for SMEs, with additional disclosures where necessary, by
an entity that does not have public accountability

17. A nonpublicly accountable entity must make an explicit and unreserved statement of
compliance with the PFRS for SMEs
A. If the entity complies with all the requirements of PFRS for SMEs.
B. If the entity complies with the vast majority of the requirements of PFRS for SMEs.
C. If the entity complies with the national GAAP based on PFRS for SMEs with some
specific differences.
D. If the entity complies with full PFRS.

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18. A complete set of financial statements for SMEs

A. Contains only a statement of financial position and an income statement.
B. Contains a statement of financial position, a single statement of comprehensive income,
a statement of changes in equity and a statement of cash flows.
C. Is similar to that provided for by full PFRS.
D. Is similar to that provided for by full PFRS except notes including accounting policies.

19. An SME whose only changes to its equity in the periods for which financial statements are
presented arise from profit or loss, payment of dividends, corrections of prior period
errors, and changes in accounting policy
A. Is required to present a statement of income and retained earnings in place of a
statement of comprehensive income and a statement of changes in equity.
B. Is permitted but not required to present a statement of income and retained earnings in
place of statement of comprehensive income and a statement of changes in equity.
C. Must choose to present either a statement of comprehensive income or a statement of
changes in equity.
D. That chooses to present a statement of income and retained earnings must also present
a statement of comprehensive income and a statement of changes in equity.

20. In accordance with the PFRS for SMEs, the financial statement that presents an entity’s
assets, liabilities and equity at a point in time
A. Must be titled the statement of financial position
B. Must be titled the balance sheet
C. Could be titled the statement of financial position or the balance sheet
D. Could be titled the statement of financial position, the balance sheet or any other title
that is not misleading

21. PFRS for SMEs mentions the following examples of other comprehensive income, except
A. Gain or loss on translating financial statements
B. Unrealized gain or loss on FA at FVOCI
C. Actuarial gains and losses
D. Changes in fair value of some hedging instruments.

22. An SME shall recognize in other comprehensive income the change in the fair value of
the hedging instrument for all of the following hedged risks, except
A. Fixed interest rate risk of recognized financial instrument
B. Foreign exchange risk in a firm commitment or highly probable forecast transaction
C. Commodity price risk in a firm commitment or highly probable forecast transaction.
D. Foreign exchange risk in a net investment in a foreign operation

23. Items of other comprehensive income of an SME should be analyzed

A. By nature
B. By function
C. Either by nature or by function
D. None of these

24. If an SME using PFRS for SMEs changes from a single-statement approach to a two-
statement approach or vice-versa in presenting total comprehensive income, the change is
treated as a
A. Change in reporting entity
B. Change in accounting estimate
C. Change in accounting policy
D. Prior period error

25. An SME may use techniques for measuring cost of inventories if the results approximate
cost. Accepted techniques for an SME include all of the following, except
A. Standard cost
B. Retail method
C. Most recent purchase price
D. Gross profit method

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26. Under PFRS for SMEs, if the selling price less cost to complete and sell is lower than cost of
inventory, the writedown is recognized
A. As an impairment loss
B. As other expense
C. As component of cost of goods sold
D. Directly in retained earnings.

27. All of the following are considered basic financial instruments, except
A. Cash
B. Accounts and notes receivable
C. Investment in bonds
D. Investment in convertible preference shares

28. All of the following are considered basic financial instruments, except
A. Demand and fixed-term deposits
B. Option and forward contracts
C. Loans from subsidiaries that are due on demand
D. A debt instrument that becomes payable on demand if the issuer defaults on interest or
principal payment.

29. An SME shall account for its investments in associates after initial recognition using
A. Either the cost model or the fair value model and using the same accounting policy for all
investments in associates.
B. Either the cost model or the fair value model and the model can be elected on an
investment-by-investment basis.
C. Any of the cost model, equity method or fair value model and using the same
accounting policy for all investments in associates.
D. Any of the cost model, equity method or fair value model and the model can be elected
on an investment-by-investment basis.

30. An SME owns 30% of the ordinary shares that carry voting rights of an investee. In the
absence of evidence to the contrary, the SME
A. Has significant influence over the investee.
B. Has significant influence over the investee, provided that it does not have joint control
over the investee.
C. Has significant influence over the investee, provided that it does not have control over
the investee.
D. Has significant influence over the investee, provided that it does not have control or joint
control over the investee.

31. Which of the scenarios would not lead to the presumption that an entity exerts significant
influence over another entity?
A. Holding directly 20% or more of the voting power of the investee.
B. Holding indirectly, through a subsidiary, 20% or more of the voting power of the investee.
C. Holding indirectly, through a joint venture, 20% or more of the voting power of the
investee.
D. Holding directly 10% of voting power of the investee and holding indirectly, through a
subsidiary, 10% of the voting power of the investee.

32. An SME must measure its investment property after initial recognition
A. Either at fair value or using the cost-depreciation-impairment model and same
accounting policy for all investment property.
B. Either at fair value or using the cost-depreciation-impairment model elected item by item.
C. At fair value.
D. At fair value, for property whose fair value can be measured reliably without undue cost
or effort on an ongoing basis and the cost-depreciation-impairment model for all other
investment property.

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33. An SME must measure its property, plant and equipment after initial recognition at
A. Cost.
B. Either the cost model or the revaluation model
C. Cost less any accumulated depreciation less any accumulated impairment losses plus
the cost of day-to-day servicing.
D. Cost plus the cost of day-to-day servicing.

34. What depreciation method is most appropriate for the significant part of an aircraft?
A. Straight line method for all parts of the aircraft
B. Production method based on air miles flown for the jet engine, and straight line method
for all other parts of the aircraft.
C. Production method based on air miles flown for all parts of the aircraft.
D. Diminishing balance method for all parts of the aircraft.

35. An SME shall measure all government grants at

A. The amount of cash or cash equivalents received.
B. The amount of cash or cash equivalents received or receivable.
C. The fair value of the asset received or receivable.
D. NIL

36. An SME must recognize a government grant that imposes specified future performance
conditions
A. In income when the grant proceeds are receivable.
B. In income over the periods necessary to match it with the related costs for which it is
intended to compensate on a systematic basis.
C. In income only when the performance conditions are met.
D. None of the above.

37. An SME must recognize government grants received before the recognition criteria are met
A. In income when the grant proceeds are received
B. In equity
C. As a liability
D. In other comprehensive income

38. Under the PFRS for SMEs, borrowing cost incurred that is directly attributable to the
construction of a qualifying asset must be
A. Expensed in the period incurred
B. Capitalized as part of the cost of the asset
C. Either expensed or capitalized
D. Neither expensed nor capitalized

39. An SME must measure intangible assets after initial recognition

A. At fair value.
B. At fair value or at cost less any accumulated amortization and any accumulated
impairment losses for all items in the same class of intangible asset.
C. At fair value or at cost less any accumulated amortization and any accumulated
impairment losses on an item-by-item basis.
D. At cost less any accumulated amortization and any accumulated impairment losses.

40. An SME acquired a trademark that has a remaining legal life of five years but is renewable
every ten years at little cost. The acquiring entity intends to renew the trademark
continuously. The useful life of the intangible asset is
A. Five years
B. Presumed to be 10 years, if the entity is unable to make a reliable estimate of its finite
useful life.
C. Fifteen years
D. Indefinite

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41. What is the accounting for research and development costs incurred by an SME?
A. All research and development costs are capitalized.
B. All research and development costs are expensed when incurred.
C. All research costs are expensed when incurred and all development costs are
capitalized when certain criteria are met.
D. All research costs are capitalized when certain criteria met and all development costs
are expensed when incurred.

42. What is the measurement of equity shares issued?

A. Fair value of cash or other resources received or receivable.
B. Fair value of cash or other resources received or receivable plus direct issue costs.
C. Fair value of cash or other resources received or receivable less direct issue costs.
D. Fair value of equity shares issued less direct issue costs.

43. An entity’s employees are entitled to 10 days holiday leave per calendar year. Unused
holiday leave may be carried forward until the employee leaves the employment of the
entity, at which time the entity will pay the employee for all unused holiday leave. The
holiday leave is
A. A short-term employee benefit
B. A postemployment benefit
C. Other long-term employee benefit
D. A termination benefit

44. The obligation of an entity to pay 50% of past employees’ postemployment medical costs
if the employee provides 25 years of service, or more is
A. A short-term employee benefit
B. A defined postemployment benefit
C. A defined contribution postemployment benefit
D. Other long-term employee benefit

45. Under PFRS for SMEs, which of the following statements in relation to defined benefit
obligation is true?
A. Past service costs are recognized as expense immediately when incurred.
B. Actuarial gains and losses are recognized immediately in full either in profit or loss, or as
component of other comprehensive income.
C. The defined benefit liability is the excess of the present value of the defined benefit
obligation over the fair value of plan assets at year-end.
D. All of these

46. Under PFRS for SMEs, a valuation allowance

A. Is not recognized for a deferred tax asset.
B. Is recognized for a deferred tax liability
C. Is recognized for a deferred tax asset so that the carrying amount of the tax asset equals
the highest amount that is more likely than not to be recovered.
D. None of these

47. Under PFRS for SMEs, which of the following statements is true in relation to share
options?
A. The share options are not recognized.
B. The share options must be measured at fair value on the date of grant.
C. The share options must be measured at intrinsic value on the date of grant.
D. The share options may or may not be recognized.

48. Under PFRS for SMEs, an exploration expenditure may be classified as tangible or
intangible asset and shall be measured using
A. Cost model
B. Fair value model
C. Either cost model or fair value model
D. Neither cost model nor fair value model

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49. A parent SME need not present consolidated financial statements when
I. The parent is itself a subsidiary and the ultimate parent or any intermediate parent
produces consolidated financial statements that comply with full PFRS or PFRS for
SMEs.
II. The parent has only one subsidiary which was acquired with the intention of disposing of
it within one year.
A. I only
B. II only
C. Both I and II
D. Neither I nor II

50. It is an entity created to accomplish a narrow and well-defined objective such as to effect a
lease, to undertake R and D activities or to securitize financial assets.
A. Special purpose entity
B. Small and medium-sized entity
C. Micro entity
D. Joint venture

END OF HANDOUT

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