(Intermediate Financial Accounting 3) : Lecture Aid

(Intermediate Financial
Accounting 3)
LECTURE AID
2016
ZEUS VERNON B. MILLAN
IFA PART 3: Zeus Vernon B. Millan

Chapter 49 PFRS for Small and Medium-sized
Entities (SMEs)
Related standard: PFRS for SMEs
Learning Objectives
• State the basic purpose for the issuance of the PFRS for
SMEs.
• Define an SME.
• Provide the distinct differences between the full PFRSs and
the PFRS for SMEs.

Purpose
• The PFRS for SMEs is was developed as a separate (stand-

alone) standard intended to apply to the general purpose
financial statements of small and medium-sized entities (SMEs).
• PFRS for SMEs is only the minimum standard that qualifying

entities need to adopt for the preparation and presentation of their
financial statements. As such, SMEs may nevertheless opt to adopt
the full PFRSs.

Authority of the PFRS for SMEs
• In the Philippines (based on SEC guideline), the PFRS for SMEs

shall be applied by corporations that:
1. Are not publicly listed and do not hold assets in a fiduciary
capacity for a broad group of outsiders; and
2. Have total assets of between ₱3 M and ₱350M or total
liabilities of between ₱3M and ₱250M.

Micro entities
• Entities that have total assets or total liabilities below ₱3M (so
called ‘micro entities’) may use “another acceptable basis of
accounting.” However, a micro entity may nevertheless elect to
apply the PFRS for SME or even the full PFRSs if it chooses to.
• Other acceptable basis of accounting

Micro entities may use any of the following bases of accounting:
1. Income tax basis of accounting, or
2. Cash basis of accounting

Transition to PFRS for SME
• On initial adoption of the PFRS for SMEs, an entity shall apply the
size criteria using the entity’s audited financial statements for the
immediately preceding financial reporting period.

Transition from PFRS for SME
• Entities ceasing to qualify as SMEs shall adopt the full PFRS

unless they qualify as micro entities.

Transition period for breaches of size criteria
• If in a current year, an SME that uses the PFRS for SMEs ceases to
qualify as an SME because it either exceeds the ceiling of the size
criteria or falls below the floor of the size criteria, such entity
may transition to the full PFRSs (exceeds) or another acceptable
accounting bases (falls below) in the next accounting period.
• To warrant a change in a financial reporting framework, the increase
or decrease in the size criteria must be judged to be “significant and
continuing.” As a general rule, a change of 20% or more of total
assets or total liabilities would be considered significant.

Overview of PFRS for SMEs
• Most of the concepts included in the PFRS for SMEs are similar
with the concepts provided in the full PFRSs. This is because the
PFRS for SMEs is just a simplification of the full PFRSs which
was intended to ease the difficulty of SMEs in applying and
implementing a generally accepted financial reporting framework.

Full PFRSs vs. PFRS for SMEs
FINANCIAL ACCOUNTING AND

REPORTING TOPICS
(FAR)


ADVANCED
FINANCIAL ACCOUNTING AND
REPORTING TOPICS
(AFAR)
AA PART 1: Zeus Vernon B. Millan
OPEN FORUM
QUESTIONS????
REACTIONS!!!!!

APPLICATION OF CONCEPTS
1. The PFRS for SMEs is

a. to be used in conjunction with the full PFRSs
b. a separate (stand-alone) standard
c. similar to the Conceptual Framework
d. all of these

2. The PFRS for SMEs is intended to apply to the
a. general purpose financial statements of SMEs
b. special purpose financial statements of SMEs
c. general purpose financial statements of SMEs and
micro entities
d. a and b

3. Which of the following statements is incorrect regarding the
application of the PFRS for SMEs?
a. The PFRS for SMEs is only the minimum standard that qualifying
entities need to adopt for the preparation and presentation of their
financial statements.
b. SMEs are prohibited from applying the full PFRSs.
c. SMEs may nevertheless opt to adopt the full PFRSs.
d. Publicly accountable entities do not have an option of applying the
PFRS for SMEs in lieu of the full PFRSs.

4. An entity has public accountability when (choose the incorrect
statement)
a. the entity’s equity securities are publicly listed.
b. the entity holds assets in a fiduciary capacity for a broad group of
outsiders
c. the entity holds assets in a fiduciary capacity for a broad group of
outsiders because they hold and manage financial resources
entrusted to them by clients, customers or members not involved in
the management of the entity, for reasons incidental to a primary
business.
d. the entity’s debt securities are publicly listed.

5. Micro entities (choose the incorrect statement)
a. are entities that have total assets or total liabilities below P3
Million
b. may use “another acceptable basis of accounting.”
c. have the options of applying either the PFRS for SME or the full
PFRSs
d. all of the statements are correct.

6. All of the following accounting provisions have been eliminated in
the PFRS for SMEs except
a. “Held for sale” classification
b. Measurement of held for trading securities at fair value
c. Segment reporting
d. Interim reporting

7. All of the following may not qualify as “small and medium-sized
entity” (SME) except
a. banks c. investment house
b. insurance company d. cooperative

8. Which of the following most likely would not qualify as a “small and
medium-sized entity” (SME)?
a. A cooperative with total assets of ₱3M and liabilities of ₱2M.
b. A real estate company with total assets of ₱350M and liabilities of
₱250M.
c. A finance corporation with total assets of ₱2M and liabilities of
₱1M.
d. All of these entities qualify as SMEs.

9. There are a number of accounting standards and disclosures that
may not provide useful information the users of SME financial
statements. Which of the following topics does the standard for SMEs
not address?
a. Revenue
b. Provisions and contingencies
c. Earnings per share
d. Liabilities and equity

10. PFRS for SME applies to an entity with
I. total assets of between P3M and P350M(US$70,000 to $8,000,000)
II. total liabilities of between P3M and P250M (US$70,000 to
$5,500,000).
a. I only
b. II only
c. I or II
d. none

11. Which of the following accounting provisions has been eliminated in
the PFRS for SMEs?
a. Earnings per share
b. Measurement of inventory at the lower of cost and NRV
c. Depreciation of long-lived assets
d. Classification of land and/or buildings as investment property

12. The ceiling of the threshold for total assets of an SME qualifier is
a. 400M
b. 3M
c. 350M
d. 250M

13. The ceiling of the threshold for total liabilities of an SME qualifier is
a. 400M
b. 3M
c. 350M
d. 250M

14. The floor of the threshold for total assets of an SME qualifier is
a. 2M
b. 3M
c. 350M
d. 250M

15. Entities below the threshold under PFRS for SME are called
a. Non-publicly accountable entities
b. Small and medium entities
c. Micro entities
d. Reportable entities

16. If an entity breaches the threshold floor or ceiling during an
accounting period and the change is considered “significant and
continuing”, the entity should transition to the applicable financial
reporting framework
a. immediately and prospectively
b. immediately with restatement of prior period financial statements
c. in the next accounting period
d. restate all prior period financial statements as of the beginning of the
earliest comparative information presented

17. In judging what constitutes a “significant and continuing” change that
affects an SMEs compliance with the threshold, which of the following
statements is(are) true?
I. The determination of what is “significant and continuing” shall be based on
management’s judgment taking into consideration relevant qualitative and
quantitative factors.
II. As a general rule, 10% or more of total assets or total liabilities would be
considered significant.
a. I only
b. II only
c. I or II
d. none

18. Which of the following may be used as “another acceptable basis of
accounting” by a micro-entity?
a. income tax basis accounting
b. cash basis accounting
c. fraudulent accounting
d. a or b

19. On 1 January 20X1 an entity acquired goods for sale in the ordinary
course of business for ₱100,000, including ₱5,000 refundable purchase
taxes. The supplier usually sells goods on 30 days’ interest-free credit.
However, as a special promotion, the purchase agreement for these
goods provided for payment to be made in full on 31 December 20X1.
In acquiring the goods transport charges of ₱2,000 were incurred:
these were due on 1 January 20X1. An appropriate discount rate is 10
per cent per year. The entity shall measure the cost of inventories at:
a. ₱102,000 b. ₱97,000 c. ₱88,364 d. ₱107,000

20. On 31 December 20X1 entity A acquired 30 per cent of the ordinary shares
that carry voting rights of entity B for ₱100,000. Entity A incurred transaction
costs of ₱1,000 in acquiring these shares. Entity A has significant influence over
entity B. Entity A uses the cost model to account for its investments in associates.
In January 20X2 entity B declared and paid a dividend of ₱20,000 out of profits
earned in 20X1. No further dividends were paid in 20X2, 20X3 or 20X4. A
published price quotation does not exist for entity B. At 31 December 20X1, 20X2
and 20X3, in accordance with Section 27 Impairment of Assets, management
assessed the fair values of its investment in entity B as ₱102,000, ₱110,000 and
₱90,000 respectively. Costs to sell are estimated at ₱4,000 throughout. Entity A
measures its investment in entity B on 31 December 20X1, 20X2 and 20X3
respectively at:
a. ₱100,000, ₱100,000, ₱100,000. d. ₱98,000, ₱101,000, ₱86,000.
b. ₱95,000, ₱95,000, ₱86,000. e. ₱102,000, ₱110,000, ₱90,000.
c. ₱98,000, ₱106,000, ₱86,000. f.Vernon
IFA PART 3: Zeus ₱101,000,
B. Millan ₱101,000, ₱101,000.
21. The facts are the same as in the immediately preceding question.
However, in this example, a published price quotation exists for entity
B. Entity A measures its investment in entity B on 31 December 20X1,
20X2 and 20X3 respectively at:
a. ₱100,000, ₱100,000, ₱100,000. d. ₱98,000, ₱101,000, ₱86,000.
b. ₱95,000, ₱95,000, ₱86,000. e. ₱102,000, ₱110,000, ₱90,000.
c. ₱98,000, ₱106,000, ₱86,000. f. ₱101,000, ₱101,000, ₱101,000.

22. On 1 January 20X1 an entity acquired a building for ₱95,000,
including ₱5,000 non-refundable purchase taxes. The purchase
agreement provided for payment to be made in full on 31 December
20X1. Legal fees of ₱2,000 were incurred in acquiring the building and
paid on 1 January 20X1. The building is held to earn lease rentals and
for capital appreciation. An appropriate discount rate is 10 per cent per
year. The entity shall measure the initial cost of the building at:
a. ₱88,364 b. ₱97,000 c. ₱102,000 d. ₱107,000

23. A manufacturer gives warranties at the time of sale to purchasers of its product. Under the
terms of the contract for sale the manufacturer undertakes to make good, by repair or
replacement, manufacturing defects that become apparent within one year from the date of sale.
On the basis of experience, it is probable (i.e., more likely than not) that there will be some claims
under the warranties. Sales of ₱10 million were made evenly throughout 20X1. At 31 December
20X1 the expenditures for warranty repairs and replacements for the product sold in 20X1 are
expected to be made 50 per cent in 20X1 and 50 per cent in 20X2. Assume for simplicity that all
the 20X2 outflows of economic benefits related to the warranty repairs and replacements take
place on 30 June 20X2. Experience indicates that 95 per cent of products sold require no
warranty repairs; 3 per cent of products sold require minor repairs costing 10 per cent of the sale
price; and 2 per cent of products sold require major repairs or replacement costing 90 per cent of
sale price. The entity has no reason to believe future warranty claims will be different from its
experience. At 31 December 20X1 the appropriate discount factor for cash flows expected to occur
on 30 June 20X2 is 0.95238. Furthermore, an appropriate risk adjustment factor to reflect the
uncertainties in the cash flow estimates is an increment of 6 per cent to the probability-weighted
expected cash flows. At 31 December 20X1 the entity recognizes a warranty provision measured
at:
a. ₱0. b. ₱210,000. c. ₱222,600. d. ₱113,300. e. ₱106,000.
24. An entity is the defendant in a patent infringement lawsuit. The entity’s
lawyers believe there is a 30 per cent chance that the court will dismiss the
case and the entity will incur no outflow of economic benefits. However, if
the court rules in favor of the claimant, the lawyers believe that there is a 20
per cent chance that the entity will be required to pay damages of ₱200,000
(the amount sought by the claimant) and an 80 per cent chance that the
entity will be required to pay damages of ₱100,000 (the amount that was
recently awarded by the same judge in a similar case). Other outcomes are
unlikely. The court is expected to rule in late December 20X2. There is no
indication that the claimant will settle out of court. A 7 per cent risk
adjustment factor to the probability-weighted expected cash flows is
considered appropriate to reflect the uncertainties in the cash flow estimates.
An appropriate discount rate is 10 per cent per year. At 31 December 20X1
the entity recognizes a provision for the lawsuit measured at:
a. ₱0. b. ₱100,000. c. ₱IFA
89,880. d. Vernon
PART 3: Zeus ₱81,709.
B. Millan
25. On 31 December 20X1, an entity has an asset of ₱4,000 for interest
receivable that will be taxed when the cash is received in 20X2. Tax is
payable at 20 per cent on the first ₱500,000 of taxable profit earned
and 30 per cent on any remainder (i.e., excess above ₱500,000). In
20X1 the entity earned taxable profit of ₱450,000. In 20X2 the entity
expects to earn taxable profit of ₱550,000. What amount should the
entity recognize for the deferred tax liability relating to the interest
receivable?
a. ₱1,200. b. ₱1,000. c. ₱940. d. ₱836. e. ₱800.

END

(Intermediate Financial Accounting 3) : Lecture Aid

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

(Intermediate Financial Accounting 3) : Lecture Aid

Uploaded by

Copyright:

Available Formats

(Intermediate Financial

ZEUS VERNON B. MILLAN

IFA PART 3: Zeus Vernon B. Millan

IFA PART 3: Zeus Vernon B. Millan

• The PFRS for SMEs is was developed as a separate (stand-

• PFRS for SMEs is only the minimum standard that qualifying

IFA PART 3: Zeus Vernon B. Millan

• In the Philippines (based on SEC guideline), the PFRS for SMEs

IFA PART 3: Zeus Vernon B. Millan

• Other acceptable basis of accounting

IFA PART 3: Zeus Vernon B. Millan

IFA PART 3: Zeus Vernon B. Millan

• Entities ceasing to qualify as SMEs shall adopt the full PFRS

IFA PART 3: Zeus Vernon B. Millan

IFA PART 3: Zeus Vernon B. Millan

IFA PART 3: Zeus Vernon B. Millan

FINANCIAL ACCOUNTING AND

IFA PART 3: Zeus Vernon B. Millan

IFA PART 3: Zeus Vernon B. Millan

IFA PART 3: Zeus Vernon B. Millan

1. The PFRS for SMEs is

IFA PART 3: Zeus Vernon B. Millan

IFA PART 3: Zeus Vernon B. Millan

IFA PART 3: Zeus Vernon B. Millan

IFA PART 3: Zeus Vernon B. Millan

IFA PART 3: Zeus Vernon B. Millan

IFA PART 3: Zeus Vernon B. Millan

IFA PART 3: Zeus Vernon B. Millan

IFA PART 3: Zeus Vernon B. Millan

IFA PART 3: Zeus Vernon B. Millan

IFA PART 3: Zeus Vernon B. Millan

IFA PART 3: Zeus Vernon B. Millan

IFA PART 3: Zeus Vernon B. Millan

IFA PART 3: Zeus Vernon B. Millan

IFA PART 3: Zeus Vernon B. Millan

IFA PART 3: Zeus Vernon B. Millan

IFA PART 3: Zeus Vernon B. Millan

IFA PART 3: Zeus Vernon B. Millan

IFA PART 3: Zeus Vernon B. Millan

IFA PART 3: Zeus Vernon B. Millan

IFA PART 3: Zeus Vernon B. Millan

IFA PART 3: Zeus Vernon B. Millan

IFA PART 3: Zeus Vernon B. Millan

IFA PART 3: Zeus Vernon B. Millan

You might also like