PFRS FOR SMEs
Summary Notes
Items
Financial Statements (Section 3 to 8)
Consolidation and Business
Combinations (Sections 9 & 19)
Associates and Jointly Controlled
Entities (Sections 14 and 15)
Financial Instruments
(Sections 11 and 12)
Accounting Treatment
"Components of FS: a) Statement of financial position; b) Single statement of
comprehensive income, or a separate income statement and a separate statement of
comprehensive income; c) Statement of changes in equity d) Statement of cash flows
e) Notes to FS
* (b) and (c) may be combined into one statement of income and retained earnings,
under certain circumstances.
Other main differences from full PFRS: a) No third statement of financial position
b) Fewer items including: a) some foreign exchange gains and losses (Section 30); b)
some changes in fair values of hedging instruments (Section 12); c)some actuarial
gains and losses (Section 28); c) No recycling of gains and losses (other than cash
flow type hedging) "
1. Simplified acquisition method acquisition method: a) Cost of investment (including
contingent consideration when probable); b) Fair value of identifiable assets and
liabilities acquired – including contingent liabilities (if present obligation can be
measured reliably) and intangibles; c) Cost of investment less fair value of net
assets recognized is goodwill - if positive, capitalize and amortize; if negative,
recognize immediately in income
2. Consolidated financial statements – aggregate on line Consolidated -by-line basis
and eliminate intra-group items
3. Combined financial statements – requires similar treatment to consolidation
1. Proportionate consolidation not allowed;
2. Same choice of valuation to be used for each class of investment
3. Valuation:
a. Cost Model
b. Equity Model
c. Fair Value Model
d. Able to measure without undue cost or effort - It is impracticable to apply a
requirement if the entity cannot apply it after making every reasonable effort
to do so. ‘Impracticable’ is a high hurdle. What constitutes undue cost or effort
is a matter of judgment. (International Accounting Standards Committee
Foundation)
1. Accounting policy option: a) Sections 11 and 12 (in full) of PFRS for SMEs; or b)
Recognition and measurement provisions of PAS 39 and the disclosure
requirements in Section 11 & 12
2. Categories: a) Basic financial instruments; b) Complex financial instruments
3. Basic principle of Section 11: Amortized cost model for all basic FI except
investments in ordinary or preference shares that are publicly traded or whose fair
value can be measured reliably – these are fair value through profit or loss
4. Basic principle of Section 12 - FI not covered by Section 11 are at FVTPL
5. "Contract that gives rise to a financial asset of one entity and a financial liability or
equity instrument of another entity"
Examples of Basic Financial Instruments:
• Cash
• Demand and fixed term deposits with banks
• Trade accounts and loans receivables and payables
• Bonds and similar debt instruments
• Investments on non-convertible preferred shares or non- puttable ordinary or
preferred shares
Examples of NOT Basic Financial Instruments
 Items
Financial Instruments – Other
instruments (Section 12)
Inventories (Section 13)
Accounting Treatment
• Investment in convertible or puttable shares
• Swaps, forwards, futures, options, rights, and other derivatives
• Loans with unusual prepayment conditions (based on tax change, accounting
change, linked to company performance)
6. Initial Measurement
 At transaction price
 Include transaction costs except for FI that will be measured at FVTPL
 If the arrangement constitutes a financing transaction, impute interest
7. Subsequent Measurement Debt instruments in the scope of Section 11: Amortized
cost using the effective interest method
8. Equity instruments in scope of Section 11: a) If publicly traded or FV can be
measured reliably: FVTPL ; and b)All others: cost less impairment
9. Impairment
• Impairment only applies to FI measured at cost or amortized cost
• At each reporting date, look for evidence that FV is below carrying amount
i. Significant financial difficulty of issuer
ii. Default or delinquency
iii. Abnormal concession granted to debtor by creditor
iv. Probable debtor bankruptcy or reorganization
1. Scope: a) investments in convertible and puttable ordinary and preference shares;
b) Options, forwards, swaps and other derivatives; c) Financial assets that have
'exotic provisions' that could result in gain or loss to holder or issuer
2. Initial Measurement - fair value (usually the transaction price)
3. Subsequent Measurement: a) FVTPL except: – investments in equity instruments
that are not publicly traded and – whose FV cannot be measured reliably; b) for
exceptions: – measure at cost less impairment
4. Hedging - Managing risks by using one financial instrument (‘hedging instrument’)
purposely to offset the variability in FV or cash flows of a recognized asset or
liability, firm commitment, or future cash flows (‘hedged item’)
5. Effect of Hedge Accounting: Defer recognizing change in FV of hedging
instrument to same period in which change in FV of the hedged item is recognized
6. Hedge accounting only for: a) interest rate risk of debt measured at interest rate
risk amortized cost; b) FX or interest rate risk in firm commitment or highly
probable commitment highly probable forecast transaction; c) price risk of a
commodity (held, firm price risk commitment or highly probable forecast
transaction); and d) FX risk in a net investment in a foreign FX risk foreign
operation
7. Hedge accounting permitted only if the hedging instrument: a) is one of four types:
– an interest rate swap – a foreign currency swap – a foreign currency forward
exchange contract – a commodity forward exchange contract and; b) meet certain
other conditions (e.g., clear documentation, etc)
8. Areas covered in PFRS but not in PFRS for SMEs: a) Derivatives and embedded
derivatives; b) Reclassifications between categories of financial instruments; c)
Detail guidance on derecognition of financial assets; d) Qualifying hedging
instruments and qualifying hedged items.
1. Subsequently valued at lower of cost and selling price less cost to complete and
sell
2. Assessed for impairment at each reporting period
3. Borrowing costs are recognized as expense
4. Similar to PFRS, LIFO is not permitted
 Items
Investment Property (Section 16)
Property, Plant and Equipment (Section
17)
Intangible Assets and Goodwill
(Sections 18 & 19)
Leases (Section 20)
Provisions and Contingencies (Section
21)
Liabilities and Equity (Section 22)
Revenues (Section 23)
Accounting Treatment
1. An entity owns a building that it rents out to independent third parties under
operating leases in return for rental payments. The entity provides cleaning,
security and maintenance services for the lessees of the building.
2. An entity owns a building that it rents out to an independent third party under a
finance lease in return for rental payments.
3. An entity owns a building from which it operates a hotel.
4. An entity holds land for an undetermined future use
1. Measurement
• Borrowing costs are not capitalized
• Carried using cost model; revaluation model not allowed
2. Depreciation
• Component accounting required only if major parts have significantly different
patterns of use or consumption
• Reassess useful life, residual value and depreciation rate only if there is
significant change in asset or its use
1. No recognition of internally generated intangible assets
2. Amortize over useful life
1. Finance leases are recognized as an asset by the lessee
2. Lease payments under operating leases are recognized by the lessee as an
expense on straight line basis over the lease term
3. Classification of leases depends on the substance of the transaction rather than
the form of the contract
1. Provisions when there is
• present obligation
• probable outflow economic benefits
• amount of the obligation can be estimated reliably
2. Contingent liabilities and contingent assets are not recognized but are disclosed in
the notes
1. Equity is the residual interest in the assets of an entity after deducting all its
liabilities
2. Financial liability is a present obligation of the entity arising from past events,
which is expected to result in an outflow of economic benefits
3. Some financial instruments that meet the definition of a liability are classified as
equity because they represent the residual interest in the net assets of the entity.
4. Split accounting must be applied to compound financial instruments
1. Revenue recognition:
• Same revenue recognition criteria as full PFRS
 Items
Share-based Payment (Section 26)
Impairment of Non-financial Assets
(Section 27)
Employee Benefits (Section 28)
Income Taxes (Section 29)
Foreign Currency Translation (Section
30)
Events after the end of the Reporting
Period (Section 32)
Related Party Disclosures (Section 33)
Specialized Activities (Section 34)
Transition to PFRS for SMEs (Section
35)
Accounting Treatment
• Services and construction contracts - recognized according to the stage of
completion
• Interest and royalties - on an accrual basis
• Dividends - when the right to receive payment is established
1. Employee share awards and share options are recognized as an expense in profit
or loss over the vesting period
2. A corresponding credit is recognized in equity
3. These amounts are measured at the fair value of the instruments granted
1. Assets (including goodwill) are tested for impairment when there is an indication
that the asset may be impaired
2. Simplified guidance on goodwill impairment when it cannot be allocated to CGUs
(entity level approach)
3. Goodwill impairment can never be reversed
1. To determine defined benefit plan obligations, use full projected unit credit method
(only if able to do so without undue cost or effort) Otherwise, process can be
simplified:
• Ignore estimated future salary increases
• Ignore future service of current employees (assume closure of plan)
• Ignore possible future in-service mortality
2. Actuarial gains and losses are recognized immediate recognized immediately
• in profit or loss or
• in OCI
1. Deferred tax is calculated using a temporary difference approach
2. A valuation allowance is recognized for net carrying amount of the deferred tax
asset to equal the recoverable amount
1. Foreign currency transactions are translated into the functional currency of the
reporting entity.
2. All monetary items and those non-monetary items which are measured at fair
value are subsequently retranslated at the end of each reporting period.
3. For practical reasons, an entity may use a rate that approximates the exchange
rates at the dates of the transactions (e.g., average rate for the period)
1. Dividends proposed or declared after the end of the reporting period are not
recognized as a liability in the reporting period.
1. Agriculture
• Biological assets are measured at FV; if not readily available, use cost
• Gain or loss from initial recognition and changes in FV are recognized in P&L
2. Extractive Industries
• Relevant section only clarifies that expenditures on acquisition or development of
assets shall be guided by Sections 17 (PPE) and 18 (Intangible assets)
1. First-time adoption requires full retrospective application of PFRS for SMEs
effective at the transition date
2. Transition date – the beginning of the earliest period for which full comparative
information is presented in accordance with PFRS for SMEs
 Items Accounting Treatment
3. Procedure in preparing FS at date of transition:
• Recognize all assets and liabilities whose recognition if required by PFRS for
SMEs
• Not recognize items as assets or liabilities if PFRS for SMEs does not permit
such recognition
• Reclassify items that it recognized under previous reporting framework in
conformity with PFRS for SMEs
• Apply PFRS for SMEs in measuring all recognized assets and liabilities
Transition to PFRS for SMEs –
Exemptions to Full Retrospective
Application