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Chapter 11
PFRS for SMEs

: TRUE OR FALSE

1. An SME is not required to provide related party disclosures.

2. The accounting for stockholders’ equity does not apply to SMEs.
3. An SME is not required to present any interim financial reports.
4. An SME does not prepare a trial balance.
5. The basic accounting concepts of prudence or conservatism, stable monetary assumption, and
going concern do not apply to SMEs.
6. The FVOCI classification is not permitted under the PFRS for SMEs.
7. The accounting procedures followed by an SME is very different from the accounting
procedures applicable to large entities.
8. An entity cannot qualify as an SME if its accountant is a CPA.
9. The PFRS for SMEs does not include an option to designate financial assets at fair value through
profit or loss.
10. An SME does not recognize any share premium from issuances of share capital at above par
value.
11. An SME does not account for any events after the reporting period.
12. An SME does not capitalize any borrowing costs.
13. An SME tests for impairment annually any goodwill recognized from a business combination.
14. An SME measures non-monetary government grants either at fair value or at nominal cost.
15. An SME may recognize goodwill from an investment in associate, which shall be amortized over
its useful life.
16. An SME does not need to present a statement of cash flows.
17. An SME may disregard vesting conditions when accounting for share-based payments granted
to employees.
18. An SME measures biological assets at fair value less costs to sell only when fair value is readily
determinable without undue cost or effort.
19. An SME does not need to estimate the residual value of its depreciable assets when computing
for depreciation expense.
20. An SME does not need to account for its post-employment benefits costs.

“Gold there is, and rubies in abundance, but lips that speak knowledge are a rare jewel.” (Proverbs 20:15)

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ANSWERS
1. FALSE 6. TRUE 11. FALSE 16. FALSE
2. FALSE 7. FALSE 12. TRUE 17. FALSE
3. TRUE 8. FALSE 13. FALSE 18. TRUE
4. FALSE 9. TRUE 14. FALSE 19. FALSE
5. FALSE 10. FALSE 15. TRUE 20. FALSE
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1. An SME shall measure a provision

a. at fair value
b. at cost
c. at the best estimate of the amount required to settle the obligation at the reporting date.
d. any of these

2. An SME shall account for compound financial instruments that it issues as follows
a. The SME shall account for compound instruments that it issues as either liability or equity,
but not both. Therefore, no allocation is necessary.
b. The SME shall allocate the proceeds received from the issuance, first to the equity
component, and the balance to the liability component.
c. The SME shall allocate the proceeds received from the issuance based on the relative fair
values of the components of the compound financial instrument.
d. The SME shall allocate the proceeds received from the issuance, first to the fair value of the
liability component without the conversion feature, and the remaining balance to the equity
component.

3. For an SME, revenue shall arise on all of the following transactions and events except
a. Sale of goods or rendering of services.
b. Construction contracts in which the entity is the contractor.
c. Use by others of entity assets yielding interest, royalties or dividends.
d. Revenue shall arise in any of these transactions.

4. SMEs account for government grants as follows (choose the incorrect statement):
a. A grant that does not impose specified future performance conditions on the recipient is
recognized in income when the grant proceeds are receivable.
b. A grant that imposes specified future performance conditions on the recipient is recognized
in income only when the performance conditions are met.
c. Grants received before the revenue recognition criteria are satisfied are recognized as a
liability.
d. Government grants are measured at the fair value of the asset received or receivable or at
nominal cost.

5. Borrowing costs that are directly attributable to the acquisition or construction of a qualifying
asset are accounted for by an SME as
a. Outright expenses
b. Capitalizable costs
c. a or b
d. a component of other comprehensive income

6. What is the effect on the financial statement elements if an SME receives goods or services in an
equity-settled share-based payment transaction?
a. Increase in assets and increase in income
b. Increase in assets and increase in liability
c. Increase in assets and increase in equity
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d. No effect on any of the financial statement elements

7. Which of the following indicators of impairment is considered an internal source of information?

a. Significant decline in market value than what is expected as a result of passage of time of
normal use.
b. Significant changes in technological, market, economic or legal environment in which the
entity operates or in the market to which an asset is dedicated.
c. Carrying amount of the net assets is more than its market capitalization.
d. Significant change with adverse effect to the entity has taken place or will take place, which
will affect expected use of asset, e.g., discontinuance, disposal, restructuring plans.

8. How do SMEs account for impairment losses on CGUs?

a. The impairment loss is charged first to goodwill and any excess is allocated to the other
assets of the CGU pro rata on the basis of the carrying amount of each asset in the CGU.
b. The impairment loss is allocated only to the other assets of the CGU pro rata on the basis of
the carrying amount of each asset in the CGU because an SME shall not recognize any
goodwill.
c. There is no accounting for impairment losses on CGUs because an SME needs only to
account for individual assets rather than groups of assets such as CGUs.
d. b and c.

9. For an SME, an impairment loss recognized for goodwill

a. shall not be reversed in a subsequent period.
b. shall be reversed in a subsequent period.
c. shall be reversed in a subsequent period, but limited only to the amount of loss previously
recognized.
d. shall not be reversed in a subsequent period in profit or loss but may be reversed through
other comprehensive income.

10. For an SME, a deductible temporary difference

a. gives rise to a deferred tax asset
b. gives rise to a deferred tax liability
c. is not recognized
d. is recognized directly in equity

11. If different tax rates apply to different levels of taxable profit, an SME shall measure its deferred
tax liability or asset using
a. the tax rates and laws that have been enacted or substantively enacted by the reporting date.
b. the tax rate(s) applicable to the period where the transactions that gave rise temporary
differences occurred.
c. the average enacted or substantively enacted rates.
d. any of these.

12. If the deferred tax asset is not wholly recoverable, the SME shall
a. recognize a valuation allowance reducing the carrying amount of the deferred tax asset.
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b. recognize a valuation allowance increasing the carrying amount of the deferred tax asset.
c. recognize a corresponding increase in deferred tax liability to decrease the net amount of
deferred taxes.
d. a or c.

13. According to the PFRS for SMEs, foreign activities can be conducted
a. by entering into foreign currency transactions
b. by having foreign operations
c. a or b
d. the PFRS for SMEs does not address this matter.

14. An entity’s functional currency is

a. the currency of the primary economic environment in which the entity operates.
b. the currency in which the entity uses in presenting its financial statements.
c. the currency required by regulatory agencies to be used in financial statements filed by the
entity.
d. all of these.

15. When an SME’s functional currency is the currency of a hyperinflationary economy,

a. all amounts in the financial statements shall be stated in terms of the measuring unit current
at the end of the reporting period.
b. some amounts in the financial statements shall be stated in terms of the measuring unit
current at the end of the reporting period.
c. all amounts for monetary assets and liabilities in the financial statements shall be restated
using the general price index, rather than the specific price index.
d. none of these. The PFRS for SMEs does not address this matter.

16. How does an SME account for events after the reporting period that provide evidence of
conditions that existed at the end of the reporting period?
a. As adjusting events after the end of the reporting period.
b. As disclosures only in the notes.
c. Either a or b as an accounting policy choice.
d. None of these. The PFRS for SMEs does not require SMEs to identify and account for events
after the reporting period.

17. If an SME declares dividends to holders of its equity instruments after the end of the reporting
period, the SME
a. shall not recognize those dividends as a liability at the end of the reporting period.
b. may recognize those dividends as a liability at the end of the reporting period.
c. may present the dividends declared as a segregated component of retained earnings at the
end of the reporting period.
d. a and b

18. Relationships between a parent and its subsidiaries

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a. shall be disclosed by an SME irrespective of whether there have been related party
transactions.
b. shall be disclosed by an SME only if there have been related party transactions.
c. is not disclosed by an SME because an SME cannot be a parent. If the SME is a subsidiary, it
is required to use the full PFRSs as these are the required standards for use by the SME’s
parent.
d. a or b as a matter of accounting policy choice.

19. The biological assets of an SME is measured using

a. The fair value model for those biological assets for which fair value is readily determinable
without undue cost or effort.
b. The cost model for those biological assets for which fair value is not readily determinable
without undue cost or effort.
c. a or b
d. The biological assets classification is not applicable to SMEs.

20. For an SME, changes in the fair value less costs to sell of biological assets are
a. recognized in profit or loss
b. recognized in other comprehensive income
c. not recognized
d. a or b

“The discerning heart seeks knowledge, but the mouth of a fool feeds on folly.” (Proverbs 15:14)
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ANSWERS
1. C 11. C
2. D 12. A
3. D 13. C
4. D 14. A
5. A 15. A
6. C 16. A
7. D 17. D
8. A 18. A
9. A 19. C
10. A 20. A