SMEs

(Small and Medium Entities)

Micro: 1-9 employees only (with asset below 3M)

Small: 10-99 employees (with asset of 3-15M)
Medium: 100-199 employees (with asset of 15-100M)
Large: 200 and above employees (with asset above 100M)

Chapter 24 Study Guide

 What is the definition of SMEs given by IASB?

o The International Accounting Standards Board defines small and medium entities
or SMEs as entities that:
 Do not have public accountability, and
 Publish general purpose financial statements for external users.

 When does an entity have public accountability?

o An entity has public accountability when:
 The debt instruments (e.g. credit cards/lines, loans, bonds) or equity
instruments (e.g. common stocks/shares, preferred stocks/shares) are
traded in a public market (e.g. LSE)
 The entity is in the process of issuing debt or equity instruments for
trading in public market (e.g. local or foreign stock exchange, over-the-
counter market, local and regional market)
 The entity holds assets in fiduciary capacity for a broad group of outsiders
as one of its primary businesses.

 Explain why entities whose equity instruments are traded in a public market are
publicly accountable.
o It’s because once an entity enters a public capital market, it will be held publicly
accountable as what the IASB concluded that, regardless of the size of an entity,
if their securities are traded in a public market, they should follow full IFRS and
not IFRS for SMEs only. (Pero why? Because that’s what the standards requires
us to do?)

 Explain why financial institutions are publicly accountable.

o The primary business for financial institutions is to hold and manage financial
resources entrusted to them by a broad group of clients and customers who are
not involved in the management of the entities. As such, they are publicly
accountable because the entities act in a fiduciary capacity.
 (Fiduciary capacity is like you are doing something that will benefit someone
else, usually financially, a trustee.)

 Explain the definition of an SME under Philippine jurisdiction.

o Under Philippine Jurisdiction, SME includes size criteria in terms of total assets
and total liabilities.
o SEC Ph defines SMEs as an entity with:
 Total Assets: P3,000,000 to P350,000,000
 Total Liabilities: P3,000,000 to P250,000,000
 Not required to file financial statements under SRC Rule 68.1
 Not in the process of issuing debt or equity instruments in a public
market.
 Not a holder of secondary license issued by a regulatory agency such as a
bank.
 Not a public utility.

 Explain micro-business entities.

o Entities whose total assets or liabilities are below the P3,000,000 threshold and
so they have the option to use either Full PFRS, PFRS for SMEs or another
acceptable basis of accounting.

 Explain transition to PFRS for SMEs.

o If an entity that uses PFRS for SMEs reached above the threshold for SMEs at the
end of the current year, they are required to transit to Full PFRS in the following
year. There will be a transition provided that what caused it to reach above the
threshold is significant and continuing (it means that the change is material and
it will not be just a one-day miracle). 20% or more of total assets and liabilities
would be considered significant as a general rule.

 What is the date of transition to PFRS for SMEs?

o The date of transition to IFRS for SMEs is the beginning of the earliest period for
which full comparative information is presented in accordance with IFRS for
SMEs in the first annual financial statements that conform to IFRS for SMEs.
Under the Ph Jurisdiction, the PFRS for SMEs is effective for annual periods
beginning on or after 01/01/2010.

 Explain the opening statement of financial position.

o The opening statement of financial position is the statement of financial position
on the date of transition to PFRS for SMEs.
o In the opening statement of FS, a first time adopter shall
  Recognize all assets and liabilities whose recognition is required by PFRS
for SMEs.
 Not recognize as assets or liabilities if the PFRS for SMEs does not permit
such recognition.
 Reclassify items that it recognized under the previous accounting
framework as one of the type of asset, liability, or component of equity,
but a different type of asset, liability or equity under the PFRS for SMEs.
 Apply PFRS for PFRS in measuring all recognized assets and liabilities.

First time adoption requires full retrospective application of PFRS for SMEs effective at
the reporting date for an entity’s first annual FS that conform with PFRS for SMEs. Thus,
the first time adopter shall recognize those adjustments directly in retained earnings or
another category of equity, if appropriate.
Mandatory exceptions to retrospective application

A first time adopter does not change the accounting that it followed previously for any
of the following transactions.

a. Derecognition of financial assets and financial liabilities

b. Hedge accounting
c. Accounting estimates
d. Discontinued operations
e. Measuring non-controlling interest

In general, no restatement of the opening statement of financial position is required if it

is impracticable (impracticability means the entity cannot apply restatement after
making every reasonable effort to do so) to do so.

 Explain the reconciliation to be made by a first time adopter of PFRS for SMEs.
o First time adopter shall make the following reconciliations in the FS:
 Reconciliation of equity reported under the previous reporting
framework to equity under the PFRS for SMEs for both the transition date
and the end of the latest period presented in the entity’s most recent
annual FS.
 Reconciliation of the P/L determined in accordance with the previous
reporting framework for the latest period in the entity’s most recent
annual FS to the P/L determined in accordance with PFRS for the same
period.
Chapter 25 Study Guide
Take note that the same provisions on the general features in the preparation of FS applies to
PFRS for SMEs and Full PFRS.

 What are the components of FS of an SME?

o It includes
 SFP,
 SOCI (either single statement OR a separate IS and SOIC),
 SOCE
 CFS
 Notes to FS

 What is a single statement of income and retained earnings of an SME?

o The SME is permitted but not required to combine IS and SRE instead of SOCI
and SOCE if the changes to the equity are the result of the ff:
 P/L
 Payment of dividends
 Prior period errors
 Changes in accounting policy

 What are some differences in the line items in the statement of financial position
under the PFRS for SMEs and full PFRS?
o Practically, they have the same line items presented in the SFP. But there are
some items that are required to present under full PFRS, but not under PFRS for
SMEs which are:
 Total of assets classified as held for sale
 Total of liabilities included in disposal group classified as held for sale
o Full PFRS requires presentation of investments in associates but not investment
in joint ventures while in PFRS for SMEs requires presentation of these two.
 So there’s a separate line item for this as amended in Paragraph 4.2 of
PFRS for SMEs (Investment carried at cost less accumulated depreciation
and impairment).

 Explain the current and noncurrent presentation of assets and liabilities of an SME.
o Except when a presentation based on liquidity provides information that is
reliable and relevant, CA, NCA, CL, NCL shall be presented by SME as separate
classification in the SFP.
o Same provisions applies to CA, NCA, CL, and NCL to both Full PFRS and PFRS for
SMEs as separate presentation.
o Same definition of CA, NCA, CL, and NCL to both Full PFRS and PFRS for SMEs.
COMPREHENSIVE INCOME – change in equity during a period resulting from transactions and
other events, other than changes resulting from transactions with owners in their capacity as
owners.

(Same definition applies to both Full PFRS and PFRS for SMEs with regards to the definition of
CI, except the components of OCI.

 Comparing the components of OCI of Full PFRS and PFRS for SMEs
Full PFRS PFRS for SMEs
Gain/Loss from translating the FS of Foreign Gain/Loss from translating the FS of Foreign
Operations. Operations.
Remeasurements of Defined Benefit Plan Actuarial gain/loss of Defined Benefit Plan
(SMEs has an option whether to present this in
OCI or P/L).
Unrealized gain/loss from derivative Change in FV of hedging instrument.
contracts designated as cash flow hedge.
Unrealized gain/loss on equity and debt Not included here.
investment measured at FV through OCI.
Revaluation surplus during the year. Revaluation surplus during the year.
Change in FV attributable to credit risk of a Not included here.
financial liability designated at FVP/L.
Note: There are only 4 items under the SME while 7 under the Full PFRS.

 Explain the reclassification of other comprehensive income under full PFRS and PFRS
for SMEs.

Reclassified to Retained Earnings Reclassified to P/L

SMEs - Gain/Loss from translating - Change in FV of hedging
the FS of Foreign Operations. instrument.
- Actuarial gain/loss of Defined
Benefit Plan if the entity
decided to present it in OCI.
- Revaluation surplus during
the year.
Full PFRS - Remeasurements of Defined - Gain/Loss from translating the FS
Benefit Plan of Foreign Operations.
- Unrealized gain/loss on - Unrealized gain/loss from
equity investment measured derivative contracts designated
at FV through OCI. as cash flow hedge.
- Revaluation surplus during - Unrealized gain/loss on debt
the year. investment measured at FV
- Change in FV attributable to through OIC.
credit risk of a financial
liability designated at FVP/L.
Note: The same provision applies to both Full PFRS and PFRS for SMEs with regards to the
presentation of SOCI, SOCE, and CFS.

 Compare full PFRS and PFRS for SMEs with respect to Change in Accounting Policy,
Change in Accounting Estimate, and Prior Period Errors.
o Same provisions and requirements applies to both Full PFRS and PFRS for SMEs
with regards to:
 Selection, Consistency, Changes of accounting policies
 Changes in accounting estimates
 Correction of prior period errors
o In selection of accounting policies:
 If specifically addressed transaction, other event or condition, then PFRS
for SMEs will be applied by SMEs.
 If not specifically addressed, the management shall consider the ff
sources in descending order:
 Requirements and guidance in PFRS on similar and related issues.
 Definition, recognition criteria and measurement of
AssLiabIncExp.
 (In addition to the above, under Full PFRS)
o Most recent pronouncement of other standard setting
bodies.
o Other accounting literature
o Accepted industry practices

NOTES TO FINANCIAL STATEMENTS – provide narrative description or disaggregation of items

presented in the financial statements and information about items that do not qualify for
recognition. (Refer to Appendix 1)
Structure of the Notes:
The notes to FS shall:

 Present basis of preparation of FS and the accounting policies applied therein.

 Disclose the information required by the PFRS for SMEs not presented elsewhere
in the FS.
 Provide information not presented in the FS but relevant to the understanding of
the information.

 Explain the order of presenting notes to financial statements of an SME.

o SMEs shall present notes in the ff order:
 Statement of compliance with PFRS for SMEs
 Summary of significant accounting policies applied
 Supporting information for the items presented in the FS
  Other disclosures
Note: Both Full PFRS and PFRS for SMEs are the same in the matter of presenting the notes to
FS but PFRS for SMEs does not require presentation and disclosure of segment of information,
earnings per share, and interim financial reports.
RELATED AND UNRELATED PARTIES

Related party - a person or an entity that is related to the reporting entity.

- A person or a close member of that person’s family is related to a reporting entity if that
person has control, joint control, or significant influence over the entity or is a member
of its key management personnel.
- An entity is related to a reporting entity if, among other circumstances, it is a parent,
subsidiary, fellow subsidiary, associate, or joint venture of the reporting entity, or it is
controlled, jointly controlled, or significantly influenced or managed by a person who is
a related party.

A related party transaction is a transfer of resources, services or obligations between a

reporting entity and a related party, regardless of whether a price is charged. If an entity has
had related party transactions during the periods covered by the financial statements, IAS 24
requires it to disclose the nature of the related party relationship as well as information about
those transactions and outstanding balances, including commitments, necessary for users to
understand the potential effect of the relationship on the financial statements.

IAS 24 requires an entity to disclose key management personnel compensation in total and
by category as defined in the Standard.

Unrelated Party - a person or entity that has no direct, indirect, beneficial or constructive
ownership interest in the recipient; and in which the recipient has no direct, indirect, beneficial
or constructive ownership interest

 Compare full PFRS and PFRS for SMEs with respect to Related Parties and Events after
Reporting Period.
o Full PFRS and PFRS for SMEs shares the same principle with regards to the
Related Party Disclosures.
 Major categories of related parties are:
 Affiliates – the parent, subsidiaries, and fellow subsidiaries.
o Example:
 Parent: SM Investment Corporation
 Subsidiaries:
 Retail (The SM Store, SM Supermarket, SM
Hypermarket, SaveMore, WalterMart
Supermarket, Inc., and Alfamart);
  Property (SM Prime Holdings, Inc.);
 Financial Services (BDO Unibank, Inc., and
China Banking Corporation)
 Associates – a company in which that other company has a
significant influence, but which is not a subsidiary company of the
company having such influence.
o Example: Globe associated with Insurance Companies.
 Joint Ventures – usually formed by two businesses with
complementary strengths.
o Example:
 A technology company joint ventured with a
marketing company to promote innovative
products or services in the market.
 Key management personnel of the entity
 Close family members of the above
 Individuals with significant influence over the reporting entity
and close family members of such individuals.
 Post-employment benefit plans.
 Major categories of unrelated parties:
 Two entities simply because they have a common director or key
management personnel.
 Two venturers simply because they share joint control over the
joint venture.
 Providers of finance, trade unions, public utilities and government
agencies simply by virtue of their normal dealings with the
reporting entity.
 A customer, supplier, franchisor, distributor, or general agent with
whom the reporting entity transacts.

EVENTS AFTER THE END OF REPORTING PERIOD – as defined in PAS 10, these are events,
favorable and unfavorable, that occur between the end of reporting period and the date when
the financial statements are authorized for issue. (Example: Adjusting events such as Provisions
and Contingencies, discovery of fraud or errors in the FS, or Impairment Losses; non-adjusting
events such as court cases settlements.)

 Both PFRS for SMEs and Full PFRS have the same provisions for accounting and
reporting these events.