Department of Accounting Education

Mabini Street, Tagum City

Davao del Norte
Telefax: (084) 655-9591, Local 116

Big Picture A
Week 1 - 3: Unit Learning Outcomes (ULO): At the end of the unit, you are expected
to:
a. Identify the applicable financial reporting framework based on nature of business
entities whether large, medium, small, and micro enterprises.
b. Compare the three financial reporting frameworks, namely: full PRFS, PFRS for
SMEs and PFRs for SEs, in terms of the accounting framework.
c. Distinguish the three financial reporting frameworks in terms of financial statement
presentations.

Big Picture in Focus: ULOa. Identify the applicable financial reporting framework
based on nature of business entities whether large, medium, small, and micro
enterprises.

Metalanguage
Please proceed immediately to the “Essential Knowledge” part since this is first
lesson we have for this course.

Essential Knowledge
To perform the aforesaid big picture (unit learning outcomes) for the first three
(3) weeks of the course, you need to fully understand the following essential
knowledge that will be laid down in the succeeding pages. Please note that you are
not limited to exclusively refer to these resources. Thus, you are expected to utilize
other books, research articles and other resources that are available in the university’s
library e.g. ebrary, search.proquest.com etc.
Large and/or Public Interest Entities
Large Entities are those entities with total assets of more than Three Hundred
Fifty Million Pesos (P350 Million) or total liabilities of more than Two Hundred
Fifty Million Pesos (P250 Million).
Public Interest Entities are those that meet the following criteria:
1. Are holders of secondary licenses issued by regulatory agencies; or
2. Are required to file financial statements under Part II of SRC Rule 68; or
3. Are in the process of filing their financial statements for the purpose of issuing
any class of instruments in a public market; or
4. Such other corporations that the Commission may consider in the future as
imbued with public interest regardless of the lack of a requirement to obtain a
secondary license from the Commission and may fall under the following
criteria:
4.1 Those grantees of legislative franchises;
4.2 Those engaged in nationalized or partly nationalized activities;
4.3 Those grantees or recipients of public funds; and
 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

4.4 Those regulated by other government agencies other than BSP or IC.

Medium-sized Entities
Medium-sized entities are those entities that meet all of the following criteria:
1. Total assets of more than One Hundred Million Pesos (P100 Million) to Three
Hundred Fifty Million Pesos (P350 Million) or total liabilities of more than One
Hundred Million (P100 Million) ti Two Hundred Fifty Million (P250 Million). If
the entity is a parent company, the said amount shall be based on the
consolidated figures.
2. Are not required to file financial statements under Part II of SRC Rule 68;
3. Are not in the process of filing their financial statements for the purpose of
issuing any class of instruments in a public market; and
4. Are not holders of secondary licenses issued by regulatory agencies.

Small Entities

Small entities are those entities that meet all of the following criteria:

1. Total assets of between Three Million Pesos (P3 Million) to One Hundred Million
Pesos (P100 Million) or total liabilities between Three Million Pesos (P3 Million
to One Hundred Million Pesos (P100 Million). If the entity is a parent company,
the said amounts shall be based on the consolidated figures;
2. Are not required to file financial statements under Part II of SRC Rule 68;
3. Are not in the process of filing their financial statements for the purpose of
issuing any class of instruments in a public market; and
4. Are not holders of secondary licenses issued by regulatory agencies.

Micro Entities
Micro entities are entities that meet all of the following criteria:
1. Total assets and liabilities are below Three Million Pesos (P3 Million).
2. Are not required to file financial statements under Part II of SRC Rule 68;
3. Are not in the process of filing their financial statements for the purpose of
issuing any class of instruments in a public market; and
4. Are not holders of secondary licenses issued by regulatory agencies.

Financial Reporting Frameworks in the Philippines

The following are the financial reporting frameworks in the Philippines:

1. PFRS
2. PFRS for SMEs
3. PFRS for Small Entities (SEs)

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Applicable Financial Reporting Framework based on the Classification

of Business Entities

The matrix below presents the financial reporting framework applicable to business
entities according to their classification:

Business Entity Applicable Financial Reporting Framework

Classification

Large and/or Public PRFS (Full)

Interest Entities

Medium-Sized Entities PRFS for SMEs

However, the following SMEs shall be exempt from the

mandatory adoption of PFRS for SMEs and may instead
apply, at their option, the full PFRS:

1. SME which is a subsidiary of a parent company

reporting under full PFRS
2. SME which is a subsidiary of a foreign parent
company which will be moving towards IFRS
pursuant to a foreign country’s published
convergence plan
3. SME , either as a significant joint venture or
associate, is part of a group that is reporting under
the full PFRS
4. SME which is a branch office or regional operating
headquarter of a foreign company reporting under
the full IFRS
5. SME which has a subsidiary that is mandated to
report under the full IFRS
6. SME which has a short-term projection that show
that it will breach the quantitative thresholds set in
the criteria; breach expected to be significant and
continuing due to its long-term effect on company’s
asset or liability size
7. SME which has a concrete plan to conduct an IPO
within the next 2 years
8. SME which has been preparing FS using full PFRS
and has decided to liquidate
9. Such other cases that Commission may consider as
valid exceptions

SME availing of any of the above-mentioned grounds for

exemption shall provide discussion in its notes to FS of

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

the facts supporting its adoption of the full PFRS instead

of PFRS for SMEs

If an SME that uses PFRS for SMEs in the current year

breaches the floor or ceiling of the size criteria at the end
of the current year, and the event that caused the change
is considered SIGNIFICANT AND CONTINUING, the
entity shall transition to the applicable financial reporting
framework it currently uses.

SIGNIFICANT and CONTINUING

- is based on management’s judgement considering the
qualitative and quantitative factors
- general rule is 20% of total consolidated assets or
liabilities

Small Entities PFRS for Small Entities

However, entities who have operations or investments

that are based or conducted in a different country with
different functional currency shall not apply this
Framework and should instead apply the full PFRS or
PFRS for SMEs. The following SMEs shall also be
exempt from the mandatory adoption of the PFRS for
SEs and may instead apply, as appropriate, the full
PFRS or PFRS for SMEs:

1. Small entity which is a subsidiary of a parent

company reporting under full PFRS or PFRS for
SMEs
2. Small entity which is a subsidiary of a foreign parent
company which will be moving towards IFRS or IFRS
for SMEs pursuant to a foreign country’s published
convergence plan
3. Small entity , either as a significant joint venture or
associate, is part of a group that is reporting under
the full PFRS or PFRS for SMEs
4. Small entity which is a branch office or regional
operating headquarter of a foreign company
reporting under the full IFRS or IFRS for SMEs
5. Small entity which has a short-term projection that
show that it will breach the quantitative thresholds
set in the criteria; breach expected to be significant
and continuing due to its long-term effect on
company’s asset or liability size
6. SME which has been preparing FS using full PFRS
and has decided to liquidate
7. Such other cases that Commission may consider as
valid exceptions

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

A small entity availing of any of the above-mentioned

grounds for exemption shall provide discussion in its
notes to FS of the facts supporting its adoption of the full
PFRS or PFRS for SMEs instead of PFRS for SEs.

If a small entity that uses PFRS for SEs in the current

year breaches the floor or ceiling of the size criteria at
the end of the current year, and the event that caused
the change is considered SIGNIFICANT AND
CONTINUING, the entity shall transition to the applicable
financial reporting framework it currently uses.

SIGNIFICANT and CONTINUING

- is based on management’s judgement considering the
qualitative and quantitative factors
- general rule is 20% of total consolidated assets or
liabilities

Micro Entities Have the option to use either Income Tax Basis or
PFRS for SEs provided however, that the audited FS
shall at least consist of:
1. Statement of Management Responsibility
2. Auditor’s Report
3. Statement of Financial Position
4. Statement of Income
5. Notes to FS
2 –year Comparative period

Where an entity breaches the prescribed threshold in

terms of total assets or total liabilities and thus falls within
different classification, the AFS of said entity shall be in
accordance with the higher framework.

Self-Help: You can also refer to the sources below to help you further
understand the lesson.

International Accounting Standards Board. IFRS for SMEs. Retrieved from

https://www.ifrs.org/issued-standards/ifrs-for-smes/view-ifrs-
smes.html/content/dam/ifrs/publications/html-
standards/english/2021/required/sme/

Van den Ende, H. Similarities and differences – A comparison of ‘full IFRS’ and IFRS
for SMEs. Retrieved from https://www.academia.edu/34951621/

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

Similarities_and_differences_A_comparison_of_full_IFRS_and_IFRS_for_S
MEs

Securities and Exchange Commission. Revised Securities Regulation Code (SRC)

Rule 68. Retrieved from https://www.sec.gov.ph/wp-
content/uploads/2019/12/2019Rule_RSRCRule68.pdf

Let’s Check
Multiple Choice.
1. Statement I: SME's are entities that have public accountability.
Statement II: SME's are entities that publish general purpose financial statements for
external users.
a. true, true
b. true, false
c. false, true
d. false, false
2. Under PFRS for SMEs, an entity has public accountability in all of the following
situations, except:
a. The entity's debt or equity instruments are traded in a public market
b. The entity is in the process of issuing debt or equity instruments for trading in a
public market
c. The entity holds assets in a fiduciary capacity for a broad group of outsiders as
one of its primary businesses.
d. The entity holds assets in a fiduciary capacity for a broad group of outsider as an
incidental part of its business.
3. Based on Philippine SEC rules, which of the following entities would not qualify as
SMEs?
a. Entities with total assets between P3M and P350M
b. Entities with total liabilities between P3M and P250M
c. Entities that are not in the process of filing FS for purposes of issuing any class of
instrument in a public market.
d. Public utility companies or holders of secondary licenses issued by a regulatory
agency.
4. Entities that are holdeers of secondary licenses issued by a regulatory agency are
not considered as SMEs. Which of the following entites is not considered a holder of
secondary licenses?
a. Public utility companies
b. Insurance and pre-need companies
c. Securities dealer/broker and mutual fund companies
d. Commercial banks, investment houses and finance companies
5. Under SEC rules, which of the following entity may qualify as a SME?
a. ReSA Life, a life insurance company
b. ReSA Mart, a supermarket based in Caloocan City
c. ReSA Waters, a water utility company servicing Metro Manila
d. ReSA Banking Corporation, a BSP-registered commercial bank.
6. Micro-business entities are entities whose total assets or total liabilities are below the
floor threshold of
a. P 1 Million
b. P 3 Million
c. P 250 Million
d. P 350 Million

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

7. A subsidiary whose parent company uses full PFRS

a. Cannot use full PFRS in all cases
b. Cannot use PFRS for SMEs in all cases
c. May use full PFRS if the subsidiary itself does not have public accountability
d. May use PFRS for SMEs if the subsidiary itself does not have public accountability
8. Entities that are in the process of filing their financial statements for the
purpose of issuing any class of instruments in a public market shall prepare
financial statements using what financial reporting framework?
a. PFRS
b. PFRS for SMEs
c. PRFS for SEs
d. Any framework at their option
9. Statement 1: Small entities who have operations or investments that are based
or conducted in a different country with different functional currency should
instead apply the full PFRS or PFRS for SMEs and not PFRS for SEs.
Statement 2: Small entity, either as a significant joint venture or associate, is
part of a group that is reporting under the full PFRS or PFRS for SMEs, is
EXEMPTED from applying PFRS for SEs.
a. Only statement 1 is True
b. Only statement 2 is True
c. Both statements are True
d. Both statements are False
10. Which of the following financial reporting frameworks is applicable to micro
entities?
a. Income Tax Basis
b. PFRS for SEs
c. PFRS for SMEs
d. Either a or b at their option

Let’s Analyze

Case Study.

The parent of a multinational group that is listed on a securities exchange has

subsidiaries in many countries. The parent prepares consolidated financial statements
for the group using full IFRS Standards. The 10 subsidiaries, A–J, prepare their
financial statements using the reporting requirements that apply in the jurisdiction in
which they are situated (ie local GAAP). In preparing the consolidated financial
statements for the group in prior reporting periods, the financial reporting team had to
reconcile the financial statements of each of its subsidiaries from local GAAP to IFRS
Standards. This required knowledge of the local GAAP in 10 different jurisdictions.

The parent entity wants to simplify the process of preparing its consolidated financial
statements and is considering the following options:

• Option 1: Require subsidiaries to prepare their financial statements in accordance

with the recognition and measurement requirements of full IFRS Standards and
provide the disclosures required by the IFRS for SMEs Standard.

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

• Option 2: Require subsidiaries to prepare their financial statements in accordance

with the recognition and measurement requirements of the IFRS for SMEs Standard,
but using the option to recognise and measure financial instruments in accordance
with IAS 39 Financial Instruments: Recognition and Measurement (see paragraph
11.2), and provide the disclosures required by the IFRS for SMEs Standard.

• Option 3: Require subsidiaries to prepare their financial statements in accordance

with the recognition and measurement requirements of the IFRS for SMEs Standard,
except for borrowing costs which would be recognised and measured in accordance
with full IFRS Standards (ie IAS 23 Borrowing Costs), and provide the disclosures
required by the IFRS for SMEs Standard.

• Option 4: Require subsidiaries to prepare their financial statements in accordance

with the IFRS for SMEs Standard.

None of the debt or equity instruments of any of the subsidiaries are traded in a public
market.

The country in which subsidiary J is situated does not permit use of the IFRS for SMEs
Standard. The countries in which the other subsidiaries are situated either require or
permit its use by entities that do not have public accountability. The country in which
subsidiary D is situated also requires use of the IFRS for SMEs Standard by entities
that are publicly accountable.

In the current reporting period, subsidiary A embarked on the process of issuing

compulsorily redeemable fixed-rate debentures in the domestic stock exchange (a
public market).

Subsidiary B’s primary business is the operation of a private school. When applying
for a place at the school a deposit is paid to the entity by the applicant. If the application
is not successful, the deposit is refunded to the applicant when the applicant is
informed that their application was unsuccessful. If the applicant is granted a place at
the school, the deposit is refunded when the student leaves the school. If the applicant
is granted a place at the school but chooses not to take up that place, the deposit is
forfeited by the applicant.

Subsidiary C operates a travel agency. It requires its clients to pay a deposit equal to
80% of the price of its package holidays when booking. The balance (20%) becomes
due 30 days before departure. If the client cancels the booking 60 days or more before
the departure date, the deposit is refunded in full. No refunds are provided for later
cancellations.

Subsidiary D’s main business is retailing food. As a sideline, it also takes deposits
from its customers in return for a promise to repay to each customer their capital plus
3% of the amount deposited 120 days after receiving the customer’s cash.

Subsidiary E’s main business is retailing food. It also provides its employees with
short-term interest-free loans so that they can purchase annual rail cards to travel to
and from work. The entity deducts the repayments from the employees’ salaries in 12
equal monthly instalments.

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 Department of Accounting Education
Mabini Street, Tagum City
Davao del Norte
Telefax: (084) 655-9591, Local 116

All of the entity’s other subsidiaries are clothing retailers.

Part A: Which subsidiaries of the multinational entity are eligible to use the IFRS for
SMEs Standard in their separate financial statements?

Part B: Under which of the options being considered by the multinational entity to
simplify the preparation of its consolidated financial statements would the subsidiaries
be able to state compliance with the IFRS for SMEs Standard?

In a Nutshell
In this part you are going to jot down what you have learned in this unit. The said statement
of yours could be in a form of concluding statements, arguments, or perspective you have
drawn from this lesson.

Now it’s your turn!

1. ________________________________________________________.
2. ________________________________________________________.
3. ________________________________________________________.
4. ________________________________________________________.
5. ________________________________________________________.

Q&A List
Do you have any question for clarification?
Questions/Issues Answers
1.
2.
3.
4.
5.

Keywords Index
Small-medium entities Microbusiness entities
Large entities Small entities
Public Interest entities PFRS for SMEs
PFRS PFRS for SEs