Small and Medium-sized

Entities (SMEs)
(FAR.2648)

R. R. Ocampo
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 a
public market, or

(b) it holds assets in a fiduciary capacity for a

broad group of outsiders as one of its
primary businesses.
(e.g. banks, credit unions, insurance
companies, securities brokers/dealers,
mutual funds and investment banks)
Entities Covered - SEC
PFRS for SMEs shall cover corporations that:
a) Have TA of between P3M and P350M or TL of
between P3M and P250M;
b) Are not required to file FS under Part II of
SRC Rule 68;
c) Are not in the process of filing their FS for
the purpose of issuing any class of
instruments in a public market;
d) Are not holders of secondary licenses issued
by a regulatory agency; and
e) Are not public utilities.
Entities Covered - SEC
PFRS for SMEs shall cover corporations that:
a) Have TA
Holders of between P3M
of secondary and P350M or TL of
licenses:
between P3M and P250M;
b) Areinvestment
Banks, not required to file finance
houses, FS under Part II of
companies,
SRC Rule 68;
insurance companies, securities
c) brokers/dealers,
Are not in the process
mutual of funds
filing and
theirpre-
FS for
the purpose
need of issuing any class of
companies
instruments in a public market;
d) Are not holders of secondary licenses issued
by a regulatory agency; and
e) Are not public utilities.
SEC Financial Reporting Frameworks

Entity Size Criteria Framework

Large and/or
publicly- TA>350M or
Full PFRS
accountable TL>250M

TA>100M-350M
Medium-sized or PFRS for SMEs
TL>100M-250M

TA=3M-100M or PFRS for Small

Small TL=3M-100M Entities (SEs)
PFRS for SEs
Micro TA and TL <3M Or Income Tax
basis
IFRS for SMEs Project
• Main objectives:
– Simplify the accounting requirements
– Reduce the cost and effort required to
produce the financial statements
• July 2003 – Start of project
• June 2009 – Approval
• July 2009 – Publication (Effective immediately)
• January 1, 2010 – Philippine effective date
• January 1, 2017 – Effective date of 2015
amendments (Initial Comprehensive
Review)
The Simplifications
• Some topics in IFRSs are omitted because
they are not relevant to typical SMEs
(ie IAS 33, IAS 34, IFRS 4, IFRS 8, NCA-HFS)

• Some accounting policy options in full IFRSs

are not allowed because a more simplified
method is available to SMEs

• Simplification of many of the recognition and

measurement principles that are in full
IFRSs

• Substantially fewer disclosures

• Simplified redrafting
Items of OCI
Recognition and Measurement
Simplifications

Investments in associates and joint

ventures

- Can be measured at cost unless there is

a published price quotation (when fair
value must be used)
- Equity method is optional
Full PFRS (PAS 28):

Equity method is mandatory

 B C D
Purchase price 10.000 15.000 28.000
Transaction costs (1%) .100 .150 .280
Total cost 10.100 15.150 28.280
Impairment loss - - (14.030)
CA, 12/31/18 10.100 15.150

FV – CTS of Entity B (P13M x .95) = P12.35M

FV – CTS of Entity C (P29M x .95) = P27.55M

FV – CTS of Entity D (P15M x .95) = P14.25M

 Answer No. 15 is letter D
B C D
Purchase price 10.000 15.000 28.000
Transaction costs (1%) .100 .150 .280
Total cost 10.100 15.150 28.280
Impairment loss - - (14.030)
CA, 12/31/18 10.100 15.150 14.250
Dividend income:
BFV – CTS
(P1M of Entity B (P13M x .95) P= P12.35M
x .25) .25M
CFV
(P8M x .25)
– CTS 2.00M
of Entity C (P29M x .95) = P27.55M
Impairment loss (D) ( 14.03M)
FV – CTS of Entity D (P15M x .95) = P14.25M
Net amount in P/L P(11.78M)
Answer No. 16 is letter A
 B C D
Purchase price 10.000 15.000 28.000
Transaction costs (1%) .100 .150 .280
Total cost 10.100 15.150 28.280
SOPA (SOLA) 1.250 4.500 ( 5.000)

SOPA - Entity B (P5M x .25) = P1.25M

SOPA – Entity C (P18M x .25) = P4.50M

SOLA – Entity D (P20M x .25) = P5.00M

 B C D
Purchase price 10.000 15.000 28.000
Transaction costs (1%) .100 .150 .280
Total cost 10.100 15.150 28.280
SOPA (SOLA) 1.250 4.500 ( 5.000)
Dividends ( .250) (2.000) -
CA-before IL 11.100 17.650 23.280
Impairment loss - - ( 9.030)
FV – CTS of Entity B (P13M x .95) = P12.35M

FV – CTS of Entity C (P29M x .95) = P27.55M

FV – CTS of Entity D (P15M x .95) = P14.25M

 Answer No. 17 is letter B
B C D
Purchase price 10.000 15.000 28.000
Transaction costs (1%) .100 .150 .280
Total cost 10.100 15.150 28.280
SOPA (SOLA) 1.250 4.500 ( 5.000)
Dividends ( .250) (2.000) -
CA-before IL 11.100 17.650 23.280
Impairment loss - - ( 9.030)
CA, 12/31/18 11.100 17.650 14.250

Answer No. 18 is letter A

 B C D
Transaction costs (1%) ( .100) ( .150) ( .280)
 B C D
Transaction costs (1%) ( .100) ( .150) ( .280)
Dividend income .250 2.000 -
FV adjustment gain (loss)

FV adjustment of Entity B (P13M – P10M) = P3M

 B C D
Transaction costs (1%) ( .100) ( .150) ( .280)
Dividend income .250 2.000 -
FV adjustment gain (loss) 3.000 14.000 (13.000)

FV adjustment of Entity B (P13M – P10M) = P3M

FV adjustment of Entity C (P29M – P15M) = P14M

FV adjustment of Entity D (P15M – P28M) = (P13M)

 Answer No. 19 is letter A
B C D
Transaction costs (1%) ( .100) ( .150) ( .280)
Dividend income .250 2.000 -
FV adjustment gain (loss) 3.000 14.000 (13.000)
Net amount in P/L 3.150 15.850 (13.280)

FV adjustment of Entity B (P13M – P10M) = P3M

FV adjustment of Entity C (P29M – P15M) = P14M

FV adjustment of Entity D (P15M – P28M) = (P13M)

Answer No. 20 is letter A

Summary

Cost Equity Fair value

SFP 39.50M 43M 57M

Profit or loss (11.78M) (8.28M) 5.72M

Problem No. 21 Answer is letter C

Purchase price P200M

Transfer tax 20M
Legal costs 1M
Total cost P221M

Cost of PPE (P221M x 1/10) P22,100,000

Depreciation-2018
[(P22.1M x .8)/50] ( 353,600)
CA of PPE, 12/31/18 P21,746,400
Recognition and Measurement
Simplifications

Investment property:

Measurement depends on circumstances

Full PFRS (PAS 40):

Fair value or cost model – Policy matter

Problem No. 22 Answer is letter A

Fair value (P25M x 9) P225.0M

Cost (P221M x 9/10) ( 198.9M)
FV adjustment gain – P/L P 26.1M
Problem No. 23 Answer is letter C

Property taxes P 20,000

Advertising 500,000
Opening function 200,000
Repairs and maintenance 120,000
Depreciation (#21) 353,600
Total expenses in P/L P1,193,600
Problem No. 24 Answer is letter B

Property taxes P 20,000

Advertising 500,000
Opening function 200,000
Repairs and maintenance 120,000
Depreciation
[(221M x .8)/50] 3,536,000
Total expenses in P/L P4,376,000
Problem No. 26 Answer is letter D
Acquisition
Investment property P1,000,000
Cash P1,000,000

FV adjustment, 12/31/17 (P1.2M – P1M)

Investment property P200,000
FV Adjustment gain P200,000

Reclassification, 12/31/18
Investment Property-Cost P1,200,000
Investment property P1,200,000

Impairment, 12/31/18 (P1.2M – P.7M)

Impairment loss P500,000
Accumulated depreciation P500,000
Recognition and Measurement
Simplifications
Research and development costs
― must be recognised as expenses
― as a consequence, internally
generated intangible assets are not
recognized
Full PFRS (PAS 38):

Research – Expense
Development – Generally expense
(Capitalized if criteria are met)

Answer No. 27 is letter A

Recognition and Measurement
Simplifications
Goodwill and other indefinite‐life intangible assets
- Always amortized over their estimated useful lives
(if useful life cannot be estimated reliably, use
management’s best estimate but not to exceed 10
years)

Full PFRS (PAS 38):

Finite – Amortized
Indefinite – Not amortized but subject to annual
impairment test
CA of goodwill, 12/31/18
(P5M x 8/10) P4M

Answer No. 29 is letter D

Governments Grants – Section 24

Without future performance conditions

• Income when the grant proceeds are
receivable

With future performance conditions

• Income only when the performance
conditions are met
Governments
Journal entry, 1/1/18Grants – Section 24
License P90,000
Deferred income from GG P90,000
Without future performance conditions
• Income when the grant proceeds are
Journal entry, 12/31/18
receivable
Deferred income from GG P10,000
Income from GG (P90,000/9) P10,000

Answer No. 32 is letter B

With future
Journal performance
entry, 1/1/18 conditions
• Income only when the performance
License
conditions are met P90,000
Income from GG P90,000

Answer No. 31 is letter A

Recognition and Measurement
Simplifications

Borrowing costs
―must be recognised as expenses

Full PFRS (PAS 23):

Qualifying asset – Capitalize

Non-qualifying asset – Expense

Answer No. 33 is letter A

SMEs in the FAR Syllabus
DIY Drill Answers
1. D
2. D
3. A
4. A
5. D
6. A
7. A
8. D
 End 