- DEFINITION | .

The Philippine Securities and Exchange Commission defi |

~ Small Entities (SEs) as those entities: ned

a. With total assets between P3,000,000 and P100,000,000

or total liabilities between P3,000,000 and P100,000,000,

b. That are not required to file financial statements under 7

‘SEC SRC Rule 68. .
c. That are not in the process of filing financial statements
for the purpose of issuing any class of instruments in a
public market.
d. That are not holders of secondary license issued by a.
- regulatory agency, such as bank, investment house and
other financial institutions. oe

Entities with operations or investments based or conducted —

in a different country with different functional currency shall
not apply the PFRS for Small Entities but instead apply PFRS
for SMEs.
_ Exemptions from PFRS for Small Entities
The following small entities are exempted. from the
mandatory adoption of PFRS for Small Entities and instead
may apply full PFRS or PFRS for SMEs, whichever is —
appropriate: :
1. Asmall subsidiary of a parent under full PFRS or PFRS
for SMEs. : =
A small subsidiary of a foreign parent moving toward full
IFRS or IFRS for SMEs.
Part of a group either as a joint venture or associate -
reporting under full PFRS or PFRS for SMEs.
A small branch office of a foreign company reporting
_ under full IFRS or IFRS for SMEs. a
_A small entity’ with short-term projection that shows it
will breach the quantitative threshold and the breach is
expected to be significant and continuing due to its
long-term effect on the entity's asset or liability size. _
6. A small entity which has been preparing financial —
statements under full PFRS or PFRS for SMEs and has
decided to liquidate. .

834
 COMPONENTS OF FINANCIAL STATEMENTS
complete
~Aside set of financial
ail wetive followin atements of a: mal
state L
entity shall.

1. Statement of financial position

2. Statement of income - .
3.. Statement of changes in equity
4, Statement of cash flows
' 5. Notes to financial statements
The statements of income and changes in equity can be
combined if the only changes arise from: .
a. Profit or loss
b. Payment of dividend
. ¢. Correction of prior period errors
d. Change in accounting policy
Other comprehensive income
Asmall entity does not recognize other comprehensive income.
All items of income and expense are recognized in profit or
>».
Change in accounting policy
A small entity shall account for a change in accounting policy
in the same manner as full PFRS except that comparative
information shall not be restated.

a. Any cumulative effect shall be recognized as adjustment ~

to the opening balance of retained earnings or other
component of equity of the current period.
* b. Comparative information shall not be restated.
_ Change in accounting estimate |
A change in accounting estimate is recognized prospectively
by including the effect in profit or loss in the period thatis =~
_affected.

If the change in estimate gives rise to change in asset, liability

or equity, it is recognized by adjusting the related asset,
liability or equity in the period of change.
835
 Correction of prior period errors
A small entity shall correct material prior period errors in
the same manner as full PFRS, except that comparative
information shall not be restated.
“a. An adjustment is recognized against opening balance of
‘retained earnings or other component of equity of the
. current period.
_b. Comparative information shall not be restated.

BASIC FINAN CIAL INSTRUMENTS

Under PFRS for Small Entities, the basic ‘nancial
instruments are:

Cash |
Bank deposits
Trade receivables and payables .
ON

Loans receivable and payable a -

Notes receivable and payable , -
2

Investments in nonconvertible preference shares and

nonputtable ordinary shares

Initial measurement

Basic financial instruments of small entities are initially

measured at transaction price including transaction. cost. -

If the arrangement constitutes a financing transaction, the

basic financial instrument is measured at the present value
of future payments discounted at the market rate of interest
for similar financial instrument.

Subsequent measurement
1. Debt instruments are measured at amortized cost using
the effective interest method.
2. Investment in unquoted shares shall be dapried at cost
less tmpairment.
3. However, investment in shares traded in an active market —
_ shall be measured at the lower of cost or fair value, with |
changes in fair value recognized in profit or loss. —

836
 Impairment of financial instrument |

1. If the financial asset is measured at amortized cost, the 7

impairment loss is the excess of carrying amount over
the present value of cash flows.
2. Ifthe financial asset is measured at cost, the impairment
loss is the excess of carrying amount over the best estimate
. of selling price.

INVENTORIES

Inventories are initially measured at cost which comprise

cost of purchase, cost of conversion and other directly
attributable cost.

The cost of inventories is determined by using FIFO,

weighted average and specific identification.

LIFO is not permitted.

Subsequent measurement

Investories are subsequently measured at the lower of cost

or market value.,

The market value is determined as the probable selling price

to willing buyers at reporting date.

The lower of cost or market value is applied individually to

| each item of inventory or to group of similar items.

If the market value is lower than cost, the difference is

accounted for.as an impairment loss.

-837
 INVESTMENT IN ASSOCIATES |
An investor shall account for all of its investments in
associates using one of the following: , EmF 68%

1. Cost model
2. Equity method

Under the cost model, the investments in associate shall be

measured at cost less accumulated impairment losses.

All dividends received from the associates are recognized as

dividend income in the income statement.

Under the equity method, the investments in associates shall

be initially measured at the transaction price including -
transaction cost. . -

The investments in associates are subsequently adjusted to

. reflect the investor's share of the profit or loss of the
associates.

Under equity method, dividends received from the associates

are accounted for as reduction of the carrying amount of the
investment and not an income.

INVESTMENT PROPERTY
Investment property is initially measured at cost.

The cost of investment property comprises:

a. Purchase price |

b. - Any directly attributable expenditures, such as legal and

brokerage fees, property taxes, transfer taxes and other
transaction cost

838
Measurement after recognit
ion
A small entity sha[ ll choose
cost model or fair value modea lS itsandaccounting pclic lier the .~
all investment property.. shall apply that policy to .
Under the cost. model, the investment pro
cost less accumulated perty is carried at
depreciation and any accumulated.
impairment losses.
4
Under the fair modei, the investment. property
is carried at
fair value at each reporting date with changes in fair value
recognized. in profit or loss.
.
It reliable measure of fair value is no longer available without
undue cost or effori for an item of investment property, the
investment property is accounted for using the cost model.

Carrying amount at the date of change becomes the cost of

the investment property. .

~ PROPERTY, PLANT AND EQUIPMENT -

A small entity shall measure property, plant and equipment
initially at cost which comprises the purchase price and any
directly attributable costs necessary in bringing the asset to
the location and condition for the intended use.

Subsequent measurement
A small entity shall choose as its accounting policy either the
cost model or fair value model and shall apply that policy to
an entire clsss of property, plant and equipment.
Under the cost model, a small entity shall measure the.
property, plant and equipment at cost less accumulated
depreciation and any accumulated impairment losses..-
Under the fair value model, a small entity shall measure
property, plant and equipment at fair value at each reporting
date with any changes in fair value recognized in profit or
loss.
If fair value is no longer available without undue cost or effort,
the property, plant and equipment shall be accounted for
using the cost model. a
The carrying amount of the property, plant and equipment
on that date becomes the initial cost.
839
\
 _ -

MONETARY GOVERNMENT GRANT -

a. A monetary grant that does not impose specified future
_ performance condition is recognized in income when the
| .
grant proceeds are receivable.

-b. A monetary grant that imposes specified future:

performance condition is recognized in income only when
the performance condition is met. - ,

_¢. Monetary grant received before the revenue recognition

criteria are met is recognized is liability. a

NONMONETARY GOVERNMENT GRANT

The small entity has an accounting policy choice using either:

a. No recognition -
b. Recognition at fair value

BORROWING COSTS ~
Borrowing costs. are interest and other costs that an entity_
incurs in connection with borrowing of funds.

Borrowing costs include interest expense calculated using

the effective interest method. 2 | 3
- Recognition

A small entity Shall rec

all borrowing costs as — an
;
e ; the period
expens in wh ognize
en incurred.
In other words, a small entity shall not capitalize an
borrowing costs related to a qualifying asset.
INTANGIBLE ASSET OTHER THAN GOODWILL |
& etal entity shall initially measure an intangible asset at

Subsequently, the intangible asset shall be measured using

the cost model. | .
Under the cost model, the intangible asset shall be measured ~_
at cost less accumulated amortization and any accumulated
impairment losses.

All intangible assets of a small entity shall be considered to

have a finite life.

All intangible assets including goodwill are amortized over |

the useful life.

If the small entity is unable to make a reliable estimate of

the useful life of an intangible asset, the life shall be
determined based on the best estimate of management but.
| not exceeding ten years.

IMPAIRMENT OF ASSET
If the recoverable amount of an asset is less than carrying
amount, an impairment loss is recognized by reducing the . -
carrying amount to recoverable amount.

The impairment loss is recognized immediately in profit or

loss. .

Measurement of recoverable amount

The recoverable amount of an asset is the higher betweea fair
value less cost of disposal and value in use. ; —_

Fair value loss cost of disposal is the amount obtainable from

the sale of an asset in an arm's length transaction between
knowledgeable, willing parties-less cost of disposal; =
In other words, fair value less cost of disposal is net selling
price of an asset.
Value in use is the present value of the future cash. flows
expected to be derived from an asset. a a

- 841
BIOLOGICAL ASSET
A small entity shall recognize a biological A8Sét or
agricultural’ produce when and. only when: - |

a.. The entity controls the asset as a result of past event,

b. It is probable that future economic ‘benefits associateg —
with the asset will flow to the entity.
c. The fair value or cost of the asset can be measured reliably
without undue cost or effort..

Measurement of biological asset

A small entity engaged in apdeulenral activity has an option

to measure biological asset applying either:

a. Cost model
b. Current market price model

Under the cost model, the biological asset is measured at cost

less any accumulated depreciation and any accumulated
impairment, losses.

‘Under the current market price model, the biological asset is

measured on initial recognition and at each reporting date .
at current market price.

The current market price is the probable dei price to willing

buyers as of reporting date.

Any changes in current market price shall be recognized in

profit or loss.

‘Measurement of agricultural produce

_ *

Agricultural produce harvested from an entity's biologic#

asset shall be measured at cur rent market price at the pou
of harvest:

Such measurement is the cost at that date when the harvested

agricultural produce is accounted for.as inventory. -

842.
PROVISION AND CONTINGENT LIABILITY _
A small entity shall recognize a provision only when:

a. The entity has an obligation at the reporting date as a

result ofa past event. .
b. It is probable that the entity will be required to transfer
_ €@conomic benefit in settlement.
c. The amount of the obligation can be estimated reliably.

Measurement of provision
Provision is both probable and measurable.
The provision shall be measured at the best estimate of the
) amount required to settle the obligation at the reporting date.

Contingent liability
A contingent liability is either a possible or present obligation
that is not recognized because it is not probable that the entity
will be required to transfer economic benefit or the amount
of the obligation cannot be estimated reliably. ,
A contingent liability is either probable or measurable but not
both.

Contingent liability is not recognized but only disclosed when |

either probable or measurable but not both.

There is no need for disclosure if the contingent liability is

remote. . . .

LEASES
A small entity shall apply the operating lease model. There
is no finance lease for a small entity.
All rental receipts shall be recognized as rent income and all
rental payments shall be recognized as rent expense.
In other words, a small entity shall account for all leases as
operating lease.
843
INCOME TAX |

A small entity shall make an accounting policy choice using

| , |
either:

a. Taxes payable method — The small entity shall recognize

a current tax liability for the tax payable on taxable income
for the current and past periods.
In other words, if the taxes payable method is followed,
the small entity is not required to recognize a deferred tax
asset or liability.
b. Deferred income taxes method — The small entity shall
recognize a deferred tax liability for future taxable amount
and deferred tax asset for future deductible amount in
addition to current liability.

Measurement deferred tax

Deferred tax asset and liability shall be measured using the .
tax rates and laws that have been enacted or substantively
enacted at the reporting date.
Deferred tax asset and liability shall not be discounted.
The carrying amount of deferred tax asset shall be reviewed:
at every year-end. .

The carrying amount of deferred tax asset shall be reduced

to the extent that it is no longer probable that future taxable
income will be sufficient.

The deferred tax asset is presented as noncurrent asset and —

the deferred tax liability is presented as noncurrent liability.

EMPLOYEE BENEFITS

Postemployment benefits are employee benefits other than

termination benefits that are payable after completion of
employment. .

An example is retirement benefit, such as pensions.

844
 2

Measurement of postemployment benefit

The accrual method is used in calculating the benefit -
obligation in accordance with the minimum retirement
benefit under R.A. 7641 or the Philippine Retirement Pay
Law. . -
However, any company policy is followed if superior or
‘higher than R.A. 7641.

-The accrual approach is applied by calculating the expected

liability as of reporting date using the current salary of the
employees and the years of service.

No consideration is made for changes in future sdlary and

service period. Moreover, there is no.recognition of actuarial
gains and losses.

In other words, only the defined contribution plan is followed

by the small entity..

. EQUITY
Equity is the residual interest in the assets of an entity after —
deducting all of its liabilities. |

Recognition and measurement

a. An entity shall measure the equity instruments at the
amount of cash received.
b. Ifthe payment is deferred and the time value of money is
material, the initial measurement shall be on a present
value basis. ;
-¢c. Ifthe equity instruments are exchanged for resources other
than cash, the equity instruments shall te recognized a
the fair value of the resources. . :
d. An entity shall account for the transaction cost as a
deduction from equity, net of any related income tax
benefit.

An entity shall reduce equity for the amount of distributions

or dividends to owners, net of any related tax benefit.

845
 SHARE-BASED PAYMENTS —
y
- A small entity distinguishes between cash settled and equit
_ settled arrangement. . - .

Measurement - Equity settled

n, a small
For equity settled share-based payment transactio
and the
entity shall measure the goods or services received
net
corresponding increase in equity with reference to the7
asset value of the equity instrument granted.

Net asset value is derived by dividing the total assets less

at
liabilities by the number of shares outstanding
- mneasurement date.
per
Actually, net-asset value is equivalent to the book value
share. ~

of the
_ For transaction with employees, the net asset value
equity instrument shall be measured at grant date.

Measurement — cash settled

tion, a small
For cash settled share-based payment treansac
and the
entity shall measure the goods or services acquired
liability incurred at the fair value of the liability.
asure the
_ Until the liability is settled, the entity shall reme with any
fair value of the liability at each reporting date
for the
changes-in fair value recognized in profit or loss a
period. . ey .

REVENUE
The accounting for revenue of a small entity shall be applied
to the following transactions and events:
Sale of goods
ep

Rendering of services
Construction contract | x

-
- Deposits or reeceivables yielding interest
CAO

shares not accounted for

Dividends from investment in
,
using the equity method

846 —
 I.

Revenue recognition .
The recognition criteria include the following:
a. The probability that the economic benefit associated with —
the transaction will flow to the entity. . _
b. The revenue and cost can be measured reliably.

Measurement
of revenue
A small entity shall measure revenue at the fair value of the
consideration received or receivable.
The fair value of the consideration received or receivable is
_ after deducting the amount of any trade discount, prompt
payment settlement discount and volume rebate. ~
The fair value also. takes into account the time value of money.
In other words, a small entity shall apply the accrual basis»
of recognizing revenue and expense.

TRANSITION TO PFRS FOR SMALL ENTITIES

' In the operating statement of financial position at transition
date, the small entity shall: ,

a. Recognize all assets and liabilities whose recognition is

required by PFRS for Small Entities.
b. Not recognize assets and liabilities if PFRS for Small
Entities 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 are a different type of asset,
liability or component of equity under the PFRS for Small .
Entities.

d. Apply PFRS for Small Entities in measuring recognized

assets and liabilities.

The date of transition to PFRS for Small Entities is the

beginning of the earliest period for which full comparative
information is presented in accordance with PFRS for Small
' Entities.

847
 Reconciliations
- A small entity shall make the following reconciliations of
the previous accounting framework and PFRS for Smal] _
_Entities: — | |

1 Reconciliation of équity in accordance with previous

~ accounting framework to the equity in accordance with
PFRS for Small Entities for both of the following dates;

a. Date of transition to PFRS for Small Entities — an

b. -End of the latest period presented in the entity's most

recent annual financial statements in accordance with
‘ previous reporting framework.

2. Reconciliation of profit or loss determined in accordance -

with the previous reporting framework for the latest
-period in the entity's most recent annual financial ~
~ statements to the profit or loss determined in accordance
with PFRS for Small Entities for the same period.