2010 Accounting Alert - PFRS For SMEs

Accounting Alert
Philippine Financial Reporting Standard for Small and Medium-sized Entities

November 2010
Member firm within Grant Thornton International Ltd
page 2
Accounting Alert Philippine Financial Reporting Standard for Small and Medium-sized Entities
Copyright 2010 by Punongbayan & Araullo
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Recommended entry: Punongbayan & Araullo Accounting Alert Philippine Financial Reporting Standard for Small and Medium-sized Entities by Punongbayan & AraulloFirst EditionMakati City Copyright 2010 by Punongbayan & Araullo
Contents
Pages
A. B. C. D. E. F.
Introduction Who can use the PFRS for SMEs? What are Small and Medium-sized Entities? When does the PFRS for SMEs take effect? What are the components of an SMEs financial statements? What are the general recognition and measurement principles under PFRS for SMEs? How does the PFRS for SMEs diverge from the full PFRS?
Topics omitted Differences in specific areas of recognition and measurement guidance Summary of main areas of differences in recognition and measurement guidance
1 2 3 5 5
6 7
G.
H. I. J.
How does the PFRS for SMEs differ from PAS 101? What specialized activities are covered in the PFRS for SMEs? How will entities transition to the PFRS for SMEs?
Areas where retrospective application is prohibited Optional exemptions Disclosure on first-time adoption Philippine SEC implementation guidelines
18 21 21
K. L.
What other guidance is included in the PFRS for SMEs? P&A concluding comment
Potential benefits Challenges of adopting the PFRS for SMEs Potential areas of impact
23 25
Assistance from P&A Appendices
28 29
To our valued clients and friends
The new Philippine Financial Reporting Standard for Small and Medium-sized Entities (PFRS for SMEs) became effective on January 1, 2010, with earlier application allowed. The standard was adopted by the Financial Reporting Standards Council (FRSC) from the international version issued by the International Accounting Standards Board (IASB). The Securities and Exchange Commission (SEC) has made the PFRS for SMEs a part of its rules and regulations, requiring covered companies to implement the new standard starting with 2010 financial statements to be filed with the SEC. The PFRS for SMEs could transform the way privately held businesses in the Philippines prepare their financial statements and accounts. We believe the new standard offers a unique opportunity to create a standardized accounting framework for privately held businesses in the country, and throughout the world as enterprises transition to the International Financial Reporting Standards from which the PFRS for SMEs is adopted.
The PFRS for SMEs provides a substantially simplified set of internationally recognised accounting principles for privately held businesses. Based on the full PFRSs, which were developed primarily for listed companies, the PFRS for SMEs will particularly benefit businesses that operate internationally. Converting to new accounting principles always involves some degree of financial and resource cost. Businesses and their advisers will have to learn new terminology and accounting techniques and make changes to their accounting software. And there could be other implications. Despite these challenges, Punongbayan & Araullo (P&A) believes the shortterm disruption will be outweighed by the longer term benefits for many privately held businesses. We have prepared this Accounting Alert to assist you in understanding and transitioning to the PFRS for SMEs. We at P&A will be glad to provide further assistance, if needed, in your implementation of the standard in your respective organization.
November 2010
A.
Introduction
The Philippine Financial Reporting Standard for Small and Medium-sized Entities (PFRS for SMEs) was approved by the Financial Reporting Standards Council (FRSC) in October 2009 for implementation in the Philippines. The standard was adopted by the FRSC from the International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs) published by the International Accounting Standards Board (IASB) in July 2009. The Preface to PFRS for SMEs issued by the FRSC adopting the standard in the Philippines is presented in Appendix A. The IASB issued the IFRS for SMEs to respond to a demand. The full IFRS were developed primarily for publicly-traded entities. However, there are far more privately held companies than publicly-traded ones. Many private companies prepare financial statements but, in much of the world, these statements are based on local requirements that differ from the full IFRS. The IASBs full IFRS were designed to meet the needs of equity investors and other users of financial statements in public capital markets and, therefore, cover a wide range of issues, as well as a sizeable amount of implementation guidance and disclosures appropriate for public companies. Users of the financial statements of SMEs do not have the same needs, but are more focused on assessing shorter-term cash flows, liquidity and solvency. In addition, many SMEs have observed that full IFRS impose a burden on them, and that this burden has grown as IFRS have become more detailed and more countries have begun to use them. The IASB has, therefore, developed the IFRS for SMEs with the twin goals of meeting user needs while balancing costs and benefits from a preparer perspective.
The Philippine scenario is not different from much of the world. In consideration of the needs of the users of financial statements of privately held companies, as well as the burden to preparers of those financial statements, the then Accounting Standards Council (ASC, now the FRSC) provided temporary relief to private companies referred to as non-publicly accountable entities (or NPAEs) in October 2005 by permitting entities that qualified as NPAEs not to use the full PFRS. The temporary relief was given under Philippine Accounting Standards (PAS) 101, Financial Reporting Standards for Non-publicly Accountable Entities. A copy of PAS 101 is presented in Appendix B. PAS 101 previously permitted NPAEs to apply the applicable financial reporting standards effective as of December 31, 2004, i.e., NPAEs were given the option to apply or not to apply any new FRSC pronouncements that became effective after December 31, 2004. Upon the adoption of the PFRS for SMEs, PAS 101 was withdrawn; hence it is no longer applicable in the Philippines. This Accounting Alert aims to provide concerned entities with some guidance in using the PFRS for SMEs, mainly by providing discussions on the differences between the PFRS for SMEs and the full PFRS on one hand, and between the PFRS for SMEs and PAS 101 on the other hand, as well as some issues relating to transitioning to the PFRS for SMEs.
B.
Who can use the PFRS for SMEs?
The PFRS for SMEs does not itself deal with this question. It provides instead that the decision as to which entities are required or permitted to use the PFRS for SMEs will rest with legislative and regulatory authorities and standard-setters in individual jurisdictions. However, it does contain a clear definition of the class of entity for which the standard is intended (see definition of the term small and mediumsized entities in Section C). This definition is essential so that (a) the IASB can decide on the accounting and disclosure requirements that are appropriate for that class of entity, and (b) the legislative and regulatory authorities, standard-setters, reporting entities and their auditors will be informed of the intended scope of applicability of the standard. The Philippine Securities and Exchange Commission (SEC), in a notice to the public issued on December 11, 2009 (see Appendix C), announced that the Commission En Banc in its meeting on December 3, 2009 resolved to adopt the PFRS for SMEs as part of its rules and regulations. The SEC Notice also included a definition of small and mediumsized entities that includes size criteria (see Section C).
In the abovementioned notice of December 11, 2009, the SEC required entities that meet the definition of SMEs to apply the PFRS for SMEs as of the effective date (which was set for annual periods beginning January 1, 2010 see Section D). This requirement has been clarified by the SEC to mean that entities qualifying as SMEs shall use the PFRS for SMEs; such entities are not allowed to use other financial reporting frameworks, such as the full PFRS, for their general purpose financial statements. This requirement is somewhat restrictive, but for the SEC, this fulfills the goal to allow comparability of financial statements of SMEs. The SEC, however, provided exemptions from the mandatory adoption of PFRS for SMEs to SMEs that meet certain criteria. The SEC notice to the public issued on October 11, 2010 (see Appendix F) provides a list of those SMEs that are exempted, which include the following: an SME is part of a group, either as a subsidiary, associate or jointly controlled entity, reporting under full PFRS; an SME is a subsidiary or branch office of a foreign subsidiary that will be moving towards IFRS pursuant to the
foreign countrys published convergence plan; an SMEs short-term projections show that it will breach the quantitative thresholds set in the criteria for SME, and the breach is expected to be significant and continuing due to its longterm effect on the entitys total assets or liabilities; an SME has concrete plans to conduct an initial public offering within the next two years; an SME has a subsidiary that is mandated to report under full PFRS; and an SME has been preparing financial statements using full PFRS and has decided to liquidate its assets.
Accounting Aler t: PFRS for SMEs Alert:
C.
What are Small and Medium-sized Entities?
SMEs as defined in PFRS for SMEs As defined in the PFRS for SMEs, the term Small and Medium-sized Entities (or SMEs) is not associated with any size criteria. Small and medium-sized entities are instead defined under the PFRS for SMEs as entities that: a. do not have public accountability, and b. publish general purpose financial statements for external users. An entity has public accountability if: a. it files, or it is in the process of filing, its financial statements with a securities commission or other regulatory organization for the purpose of issuing any class of instruments in a public market; or
b. it holds assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses. This is typically the case for banks, credit unions, insurance companies, securities brokers/dealers, mutual funds and investment banks. Entities holding assets in a fiduciary capacity for reasons incidental to a primary business are not, however, considered to be publicly accountable and, hence, can use the PFRS for SMEs. Examples of where this may be the case are travel or real estate agents, schools, charitable organizations, cooperative enterprises requiring a nominal membership deposit and sellers that receive payment in advance of delivery of goods and services such as utility companies.
SMEs as defined by the Philippine SEC As mentioned earlier, the above definition of SMEs under the PFRS for SMEs does not include any size criteria. However, the Philippine SEC, in its notice of December 11, 2009 cited earlier, adopted the following definition of small and medium-sized entities that includes size criteria: 1. The entity has total assets of between P3 million and P350 million or total liabilities of between P3 million and P250 million; 2. It is not required to file financial statements under SRC Rule 68.1; 3. It is not in the process of filing its financial statements for the purpose of issuing any class of instruments in a public market; 4. It is not a holder of a secondary license issued by a regulatory agency, such as a bank (all types of banks), an investment house, a finance company, an insurance company, a securities broker/ dealer, a mutual fund and a pre-need company; and 5. It is not a public utility.
The above SEC definition of SMEs is essentially the same as the definition of NPAEs adopted by the then Accounting Standards Council (now the FRSC) under PAS 101, with the exception of the amounts set for the size criteria. For the definition of SMEs, the size criteria set by the SEC include a floor (P3 million for both total assets and total liabilities) and a ceiling (P350 million for total assets and P250 million for total liabilities). For the definition of NPAEs, the size criteria were pegged at a single amount for total assets (P250 million) and total liabilities (P150 million); there was no ceiling or floor similar to that provided for the definition of SMEs. This difference in size criteria has some implications with regard to the implementation in the Philippines of the PFRS for SMEs, specifically on the matter relating to transition to the PFRS for SMEs (see relevant discussion in Section J).
D.
When does the PFRS for SMEs take effect?
The SEC has set the effective date of PFRS for SMEs for annual periods beginning January 1, 2010. This effective date was later on revised by the SEC to allow early application of the PFRS for SMEs in 2009 as long as the SMEs are
capable, in terms of systems and resources, to efficiently transition to PFRS for SMEs and provided the impact of the early adoption is disclosed in the financial statements (see related discussion under Philippine SEC Implementation Guidelines in Section J).
E.
What are the components of an SMEs financial statements?

The PFRS for SMEs defines what statements and disclosures shall be presented as part of a complete set of financial statements, which are the same components required under the full PFRS. These include the following: a statement of financial position as at the reporting date; either (i) a single statement of comprehensive income or (ii) a separate income statement and a separate statement of comprehensive income; a statement of changes in equity for the reporting period; a statement of cash flows for the reporting period, with the cash flows from operating activities presented using either the indirect method (i.e., profit or loss is adjusted for the effects of non-cash transactions, any deferrals or accruals of past or future operating cash receipts or payments, and items of income or expenses associated with investing or financing cash flows) or the direct method (i.e., major classes of gross cash receipts and gross cash payments are disclosed); and notes, comprising a summary of significant accounting policies and other explanatory information. In general, comparative information is required in respect of the previous comparable period for all amounts presented. As a simplification in comparison to full PFRS, where the only changes to equity during the periods for which financial statements are presented arise from profit or loss, payment of dividends, corrections of prior period errors, and changes in accounting policy, the entity may present a single statement of income and retained earnings in place of a separate statement of comprehensive income and a statement of changes in equity.
F.
What are the general recognition and measurement principles under PFRS for SMEs?
The PFRS for SMEs has been designed essentially to work as a stand-alone document, with no mandatory cross references to full PFRS. Where full PFRS permits a number of possible accounting options for a particular transaction, the standard presents SMEs with a simplified version of the full requirements and reduces the number of options available to them. The requirements contained in the PFRS for SMEs for recognizing and measuring assets, liabilities, income and expenses are based on pervasive principles that are derived from the FRSCs Framework for the Preparation and Presentation of Financial Statements and from the full PFRS. Where the PFRS for SMEs does not contain a requirement that applies specifically to a transaction or other event or condition, the standard requires that management applies judgment in developing an accounting policy that results in information that is relevant and reliable.
In making such a judgment, a hierarchy is provided, with management being advised to refer to and consider the applicability of the following sources in descending order: a. the requirements and guidance in the PFRS for SMEs dealing with similar and related issues, and b. the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses and the pervasive principles in the section in the IFRS for SMEs on Concepts and Pervasive Principles. In making the judgment, management may also consider the requirements and guidance in the full PFRS dealing with similar and related issues, but this is not mandatory.
G.
How does the PFRS for SMEs diverge from the full PFRS?
Compared to the full PFRS, the PFRS for SMEs contains a number of simplifications. Principal among these are using simplified drafting in writing the standard, making the final document easier to understand and follow, and reducing the number of disclosures to be made when preparing the financial statements. The IASB has indicated that future revisions to the IFRS for SMEs (from which the PFRS for SMEs is adopted) will be made once every three years, providing a stable platform to both preparers and users of financial statements prepared under the standard. The IASB also indicated that it expects to undertake a thorough review of the SMEs experience in applying the IFRS for SMEs when two years of financial statements using the standard have been published by a broad range of entities. The IASB expects that it will then propose amendments to address the implementation issues identified in that review. It will also address issues arising from new and amended IFRS that are published in the intervening period. Any such amendments made by the IASB are expected to be adopted by the FRSC for implementation by SMEs in the Philippines.
The table below provides a snapshot of how the PFRS for SMEs compares with the full PFRS: Full PFRS
Numbered by standard
PFRS for SMEs

Organized by topic (e.g., inventories) Around 300 potential disclosures Less than 230 pages
Around 3,000 potential disclosures Around 2,800 pages in length Updated several times a year
Anticipated to be updated on a threeyearly basis
A snapshot of the PFRS for SMEs containing the section no., title and description of the various sections of the standard is presented in Appendix D.
Topics omitted The PFRS for SMEs also omits a number of topics found in the full PFRS that are not considered relevant to the needs of small and medium-sized entities. Topics omitted from the PFRS for SMEs are: Segment reporting Interim reporting Earnings per share Insurance Assets held for sale Differences in specific areas of recognition and measurement guidance The following paragraphs set out some particular areas of interest, where the requirements in the PFRS for SMEs diverge from those of the full PFRS. The issues listed are by no means exhaustive, and reference should be made to the text of the standard itself for a proper understanding of all the potential differences that may arise.
Financial instruments (Sections 11 and 12)
In seeking to meet user needs while balancing costs and benefits from a preparers perspective, the PFRS for SMEs divides its requirements on financial instruments into two sections one dealing with basic financial instruments and the other with more complex financial instruments and transactions. Examples of financial instruments that are normally considered basic financial instruments (covered under Section 11 of the PFRS for SMEs) include: cash demand and fixed-term deposits when the entity is the depositor (e.g., banks accounts) commercial paper and commercial bills held accounts, notes and loans receivable and payable (including loans to or from subsidiaries or associates that are due on demand) bonds and similar debt instruments
investments in nonconvertible preference shares and non-puttable ordinary and preference shares commitments to receive a loan if the commitment cannot be net settled in cash Examples of financial instruments that will normally be considered more complex financial instruments and transactions (covered under Section 12) include: asset-backed securities, such as collateralized mortgage obligations, repurchase agreements and securitized packages of receivables options, rights, warrants, futures contracts, forward contracts and interest rate swaps that can be settled in cash or by exchanging another financial instrument financial instruments that qualify and are designated as hedging instruments commitments to make a loan to another entity commitments to receive a loan if the commitment can be net settled in cash
The PFRS for SMEs gives entities a choice to apply either: a. the provisions of both Sections 11 and 12 of the PFRS for SMEs in full, or b. the recognition and measurement provisions of PAS 39, Financial Instruments: Recognition and Measurement. Where an entity does choose to adopt the recognition and measurement provisions of PAS 39, however, it still makes the disclosures for financial instruments that are required by Sections 11 and 12 of the PFRS for SMEs rather than those in PFRS 7, Financial Instruments: Disclosures. Basic financial instruments (Section 11) Under PFRS for SMEs, basic financial instruments are categorized as either measured at: a. amortized cost or cost less impairment; or b. fair value with changes in fair value recognized in profit or loss (this will cover investments in nonconvertible and non-puttable preference shares and nonputtable ordinary shares that are publicly traded or whose fair value can otherwise be measured reliably).
Under the full PFRS, there are four categories of financial instruments, for example: a. a financial asset or financial liability at fair value through profit or loss b. held-to-maturity investments (carried at amortized cost) c. loans and receivables (carried at amortized cost) d. available-for-sale financial assets (carried at fair value) (As additional information, the IASB has completed the initial phase of its project to replace IAS 39 in its entirety. The initial phase addresses the classification and measurement of financial assets, reducing the complexity in accounting for financial instruments by having fewer categories of financial assets and a principlebased approach to their classification. Under this new requirement, which will take effect when the other phases of the project are completed and become effective, entities are required to classify a financial asset at either amortized cost or fair value on the basis of the entitys business model for managing the financial asset, and the contractual cash flow characteristics of the financial asset.)
Other financial instruments issues (Section 12) In general, financial instruments that do not meet the criteria set out in the PFRS for SMEs for treatment as basic financial instruments are subsequently measured at fair value at the end of each reporting period, with changes in their fair value being recognized in profit or loss. (The equivalents of PAS 39s classifications on available-for-sale financial assets and held-to-maturity investments are not included in the PFRS for SMEs.) Section 12 of PFRS for SMEs also sets out the conditions that must be met for hedge accounting to be used and how it is to be applied. Compared with PAS 39, the guidance contained in PFRS for SMEs is a simplified version but is more restrictive as it permits hedge accounting only for certain specified risks and only if the hedging instrument complies with all the prescribed terms and conditions.
In vestments in associa tes Inv associates (Section 14)
The PFRS for SMEs contains an accounting policy election in respect of investments in associates. This applies to the accounting in consolidated financial statements and in the financial statements of an investor that is not a parent but has an investment in one or more associates. Under the accounting policy election for investments in associates, an investor shall account for all such investments under either: the cost model (cost less any accumulated impairments losses); the equity model (initial recognition at the transaction price, with subsequent adjustments to reflect the investors share of the profit or loss and other comprehensive income of the associate); or the fair value model The cost model should not be applied to investments in associates for which there is a published price quotation (the fair value model must be used where this is the case).
Under the full PFRS, there are no similar options provided in PAS 28, Investments in Associates. Instead, investments in associates are required to be accounted for using the equity method.
In vestments in joint v entur es Inv ventur entures (Section 15)
In vestment pr oper ty Inv proper operty (Section 16)
A similar accounting policy election (allowed for investments in associates see above) applies to investments in jointly controlled entities (JCEs). The PFRS for SMEs does not permit the use of proportionate consolidation. Under the full PFRS, PAS 31, Interests in Joint Ventures, a venturer shall recognize its interest in a JCE using proportionate consolidation or, as an alternative, the equity method. (As additional information, there is a proposed amendment to PAS 31 to eliminate the proportionate consolidation method as an alternative for measurement of interests in joint ventures.)
Under the PFRS for SMEs, investment property with fair value that can be measured reliably without undue cost or effort on an ongoing basis is accounted for at fair value, with changes in fair value being accounted for through profit or loss. (It is not possible to elect to use the cost-depreciationimpairment model for such property.) All other investment properties are accounted for as property, plant and equipment using the costdepreciation-impairment model. Under PAS 40, Investment Property, with certain exceptions, an entity shall measure its investment property using either the fair value model or the cost model. The accounting policy chosen shall be applied to all of the investment properties.
10 Accounting Aler t: PFRS for SMEs Alert:
Pr oper ty , plant and equipment Proper operty ty, (Section 17)
Items of property, plant and equipment are measured under the PFRS for SMEs using the costdepreciation-impairment model. There is no option to use a revaluation model. On the other hand, full PFRS under PAS 16, Property, Plant and Equipment, allows measurement of property, plant and equipment using either the cost model or the revaluation model. The accounting policy chosen shall be applied to an entire class of property, plant and equipment.
Intangible assets other than good will (Section 18) oodwill
The criteria for recognition as assets are always considered satisfied for intangible assets that are separately acquired. Intangibles acquired in a business combination are normally recognized as assets on the assumption that their fair value can be measured with sufficient reliability. Measurement after recognition For those that meet the criteria for recognition as assets, the PFRS for SMEs requires intangible assets to be measured at cost less accumulated amortization and accumulated impairment losses. For the purpose of the PFRS for SMEs, all intangible assets are considered to have a finite useful life. Where an entity is unable to make a reliable estimate of the useful life of an intangible asset, the life is presumed to be ten years. PAS 38, on the other hand, allows an entity to choose either the cost model or the revaluation model in valuing intangible assets. Intangible assets with finite useful lives are amortized over their useful lives; those with infinite useful lives are not amortized.
Business combina tions and combinations good will (Section 19) oodwill
Under the PFRS for SMEs, the acquirer in a business combination is required to allocate the cost of a business combination at the acquisition date, by recognizing the acquirees identifiable assets and liabilities and a provision for those contingent liabilities that satisfy the recognition criteria under the PFRS for SMEs at their fair values at that date. Any excess of the cost of the business combination over the acquirers interest in the net fair value of the identifiable assets, liabilities and provisions for contingent liabilities so recognized shall be accounted for as goodwill (positive); any excess of the acquirers interest in the net fair value of the identifiable assets, liabilities and provisions for contingent liabilities over cost shall be accounted for as the so-called negative goodwill. Where a negative goodwill is identified, the identification and measurement of the acquirees assets, liabilities and contingent liabilities and the measurement of the cost of the combination is first of all reassessed. After this reassessment, any remaining negative goodwill is recognized immediately in profit or loss.
Initial measurement Under full PFRS, PAS 38, Intangible Assets, allows the recognition of an intangible asset from development (or from the development phase of an internal project) when certain conditions are complied with. The PFRS for SMEs, on the other hand, requires an entity to recognize an expenditure incurred internally on an intangible item, including all expenditures for both research and development activities, as an expense when it is incurred, unless it forms part of the cost of another asset that meets the recognition criteria under the PFRS for SMEs.
Accounting Aler t: PFRS for SMEs 11 Alert:
After initial recognition, the acquirer shall measure goodwill acquired in a business combination at cost less accumulated amortization and accumulated impairment losses. Where an entity is unable to make a reliable estimate of the useful life of goodwill, the life is presumed to be ten years. The process for the determination of goodwill or negative goodwill under the PFRS for SMEs is generally similar to that in the full PFRS under PFRS 3, Business Combinations. However, under PAS 38, Intangible Assets, intangible assets with indefinite useful lives are not amortized; therefore, goodwill, being considered as having indefinite useful life, is not amortized under the full PFRS. Additionally, PAS 36, Impairment of Assets, requires annual testing of goodwill acquired in business combination for impairment, irrespective of whether there is any indication of impairment. The requirement under the PFRS for SMEs to amortize goodwill is an important simplification compared to the requirements in full IFRS, as it eliminates the need for a detailed annual impairment test. Under the PFRS for SMEs, an impairment test is only needed for goodwill where there is an indicator of impairment.
Impairment of goodwill (Section 27) In testing for impairment of goodwill (in cases where there is an indicator of impairment), the PFRS for SMEs requires that where goodwill cannot be allocated to individual cash-generating units (or groups of cash-generating units) on a non-arbitrary basis, then for the purpose of testing goodwill, a reporting entity tests impairment by determining the recoverable amount of either: a. the acquired entity in its entirety, if the goodwill relates to an acquired entity that has not been integrated (integrated means the acquired business has been restructured or dissolved into the reporting entity or other subsidiaries), or b. the entire group of entities, excluding any entities that have not been integrated, if the goodwill relates to an entity that has been integrated This treatment allows goodwill to be allocated and tested for impairment at a higher level than that required by full PFRS under PAS 36 where goodwill is allocated to the lowest level within the entity at which the goodwill is associated and monitored for internal management purposes.
Bor r owing costs (Section 25) Borr
The PFRS for SMEs requires an entity to recognize all borrowing costs as an expense in profit or loss in the period in which they are incurred. Capitalization of borrowing costs is not permitted. The full PFRS, under PAS 23, Borrowing Costs, requires an entity to capitalize borrowing costs that are directly attributable to the acquisition, construction or production of a qualifying asset as part of the cost of that asset. Other borrowing costs are recognized as expense in the period when incurred. A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale.
Shar e-based pa yment Share-based payment (Section 26)
The requirements for the recognition and measurement of share-based payment under the PFRS for SMEs are based on those contained in the full PFRS, under PFRS 2, Share-based Payment. The PFRS for SMEs does, however, provide simplified guidance on measuring the fair value of share options and other forms of sharebased payment with the following three-tier measurement hierarchy: a. If an observable market price is available for the equity
instruments granted, that price shall be used. b. If an observable market price is not available, the fair value of share options granted shall be measured using entityspecific observable market data such as for a recent transaction in the share options. c. If an observable market price is not available and obtaining a reliable measurement of fair value under (b) is impracticable, an entity shall indirectly measure the fair value of share options using an option pricing model. The inputs for the model should use market data to the greatest extent possible. A similar hierarchy applies to the measurement of shares and share appreciation rights.
Employee benefits (Section 28)
defined benefit plans for the period is simply computed as the net change in its defined benefit liability during the period (the latter being determined as the present value of the obligations minus the present value of plan assets at the reporting date). Allocation of actuarial gains and losses The PFRS for SMEs gives entities an accounting policy election in respect of the allocation of their actuarial gains and losses. Under this election, an entity shall either: a. recognize all actuarial gains and losses in profit or loss, or b. recognize all actuarial gains and losses in other comprehensive income In computing the defined benefit liability under PAS 19, a limit is applied to the portion of actuarial gains and losses that can be recognized in profit or loss (referred to as the corridor approach). Under the PFRS for SMEs, there is no ability to use such corridor approach. (As additional information, there is a proposed amendment to PAS 19 to remove the corridor approach.)
Actuarial valuation model If an entity is able, without undue cost or effort, to use the projected unit credit method (which is the method required by PAS 19) to measure its defined benefit obligation and the related expense, it shall do so. However, where an entity is unable to do so without undue cost or effort, it is permitted to make the following simplifications in measuring its defined benefit obligation with respect to current employees. It may: ignore estimated future salary increases; ignore future service of current employees; and ignore possible in-servicemortality of current employees between the reporting date and the date employees are expected to begin receiving postemployment benefits. However, mortality after service (i.e., life expectancy) will still need to be considered.
Determination of cost for the period for defined benefit plans Under the PFRS for SMEs, for defined benefit plans, the determination of the defined benefit liability (or asset) and related cost of the defined benefit plan is much simpler than that in the full PFRS under PAS 19, Employee Benefits. An SMEs cost of its
The PFRS for SMEs does not require an independent actuary to be engaged to perform the actuarial valuation, nor does it require a comprehensive actuarial valuation to be performed annually. If the principal actuarial assumptions have not changed significantly during the periods between actuarial valuations, the defined benefit obligation can be measured by adjusting the prior period measurement for changes in employee demographics such as number of employees and salary levels.
Income tax (Section 29)
The full PFRS at present does not include the above-mentioned requirements (sometimes referred to as uncertain tax positions). However, there is another standard (PAS 37, Provisions, Contingent Liabilities and Contingent Assets) that applies as well to income tax matters that may result in the recognition or disclosure of contingencies relating to taxes.
The PFRS for SMEs requires SMEs to measure deferred tax assets and liabilities at an amount that includes the effect of possible outcomes of a review by the tax authorities since the uncertainty about whether the tax authorities will accept the amounts reported to them by the entity affects the amount of the current tax and deferred tax. The entity shall use the probabilityweighted average amount of all possible outcomes. The effect on deferred tax expense arising from a change in the effect of the possible outcomes of a review by the tax authorities shall be disclosed.
Summar y of main areas of differences in recognition and measurement guidance Summary The following table summarizes some of the main simplifications made in the PFRS for SMEs, as well as some examples of options available under full PFRS that are not included in the PFRS for SMEs: Subject
Basic financial instruments
Full PFRS
There are four categories of financial instruments.
PFRS for SMEs

There are two categories, i.e., (a) amortized cost or cost less impairment, and (b) fair value through profit or loss. Rules on the use of hedge accounting are much simplified (although more restricted). Allows option to use PAS 39 for recognition and measurement (if this option is taken, SME still makes disclosures required under PFRS for SMEs and not under PFRS 7).
Other financial instruments issues
Hedge accounting is only possible where strict documentation and effectiveness requirements are met.
Investments in associates (in consolidated FS or in FS of investor that is not a parent)
Requires use of equity method of accounting
Option to account for investments at: (a) cost; (b) under the equity method; or (c) at fair value through profit or loss (compulsory where a quoted price is available) Option to account for investments at: (a) cost; (b) under the equity method; or (c) at fair value through profit or loss (compulsory where a quoted price is available) No proportionate consolidation option
Investments in joint ventures (in consolidated FS or in FS of investor that is not a parent)
Option to account for investments at: (a) proportionate consolidation; or (b) under the equity method
Subject
Investment property
Full PFRS
Option to measure asset at: (a) costdepreciation-impairment model; or (b) fair value model
PFRS for SMEs

Must be accounted for at fair value if such a value is available without undue cost or effort. Cost model should be used only when fair value is not available. Measurement at cost or fair value is driven by circumstances (i.e., availability of fair value without undue cost or effort) rather than by choice.
Property, plant and equipment
Option to measure asset at: (a) the cost model; or (b) revaluation model
Requires use of the costdepreciation-impairment model No revaluation option
Intangible assets other than goodwill
Development costs are capitalized where the six specific criteria are met.
Expenditures incurred internally on intangible item, including all research and development costs, are expensed. Requires subsequent measurement of capitalized intangible assets (such as those separately acquired) at cost less accumulated amortization and impairment losses No revaluation option for capitalized intangible assets
Option to measure asset at: (a) the cost model; or (b) revaluation model
Intangible asset with infinite life is not amortized but impairment testing is required annually, and whenever indicator of impairment exists.
All intangible assets are considered to have a finite life, hence, are amortized. If there is no reliable estimate of useful life, presumed life is ten years.
Business combinations and goodwill
Goodwill is not amortized.
Goodwill is amortized (presumed life of ten years is used where reliable estimate of useful life cannot be made). Impairment testing is only needed when indicator of impairment exists.
Impairment testing is required annually, and whenever indicator of impairment exists. Goodwill is allocated to and tested for impairment at the lowest level within the entity at which goodwill is associated and monitored for internal management purposes.
Goodwill is allocated and tested for impairment at a higher level.
Subject
Borrowing costs
Full PFRS
Borrowing costs directly attributable to acquisition, construction or production of a qualifying asset are capitalized. Other borrowing costs are expensed when incurred.
PFRS for SMEs

All borrowing costs are expensed.
Share-based payment
In case market prices are not available, fair value of shares and share options is estimated using a valuation technique that incorporates all relevant factors and assumptions. Detailed guidance on many valuation issues is provided. Actuarial gains and losses are not recognized as an income or expense unless unrecognized gain or loss exceeds 10% of the greater of the defined benefit obligation and fair value of plan assets. The amount exceeding this 10% corridor is charged or credited to profit or loss over the employees expected average remaining working lives, or through any systematic method that results in faster recognition of actuarial gains or losses. There is no specific provision on consideration (and disclosure) of the effect of uncertain tax positions (i.e., possible outcomes of a review by tax authorities) on deferred tax accounts.
A simplified guidance (i.e., a threetier measurement hierarchy) for measuring the fair value of share options and other form of sharebased payment is provided.
Post-employment defined benefit plans
The corridor approach for recognizing actuarial gains and losses is not permitted. Any change in the defined benefit liability is recognized as the cost of the defined benefit plan for the period.
Income tax
Requires measurement of deferred tax assets and liabilities at an amount that includes the possible effect of uncertain tax positions and requires disclosure of related information in the financial statements.
H.
How does the PFRS for SMEs differ from PAS 101?
As mentioned in Section A earlier, PAS 101 previously permitted NPAEs to apply the applicable financial reporting standards effective as of December 31, 2004, i.e., NPAEs were given the option to apply or not to apply any new FRSC pronouncements that became effective after December 31, 2004. Having been given such an option: some NPAEs adopted the pronouncements effective as of December 31, 2004 but did not adopt any new pronouncements made effective after December 31, 2004; other NPAEs adopted the pronouncements effective as of December 31, 2004 and applied some new standards made effective after December 31, 2004; while some other NPAEs applied the full PFRS.
Those NPAEs that now qualify as SMEs under the PFRS for SMEs are required to apply the PFRS for SMEs, except for those entities exempted by the SEC from the mandatory adoption of the PFRS for SMEs (see discussion in Section B and Appendix F). For the guidance of NPAEs that previously used PAS 101, we present below some of the major differences between PAS 101 and the PFRS for SMEs. (For NPAEs that previously used the full PFRS and are now required to use the PFRS for SMEs, the discussions in Section G above will be relevant.)
The issues listed below are by no means exhaustive and, therefore, reference should be made to the text of the relevant standards for a proper understanding of those issues. Size criteria The size criteria for NPAEs (as the term is used and defined under PAS 101) were pegged at a single amount for total assets (P250 million) and total liabilities (P150 million); there was no ceiling or floor similar to that provided for SMEs (as the term is defined and used under the PFRS for SMEs). The size criteria for SMEs include a floor (P3 million for both total assets and total liabilities) and a ceiling (P350 million for total assets and P250 million for total liabilities).
Option to choose financial reporting framework/ standards NPAEs were given the option to apply accounting standards effective as of December 31, 2004 and to apply or not to apply any new FRSC pronouncements that became effective after December 31, 2004, or to apply the full PFRS. Qualifying SMEs, on the other hand, are required to apply the PFRS for SMEs, save for those entities that are exempted by the SEC from the mandatory adoption of the PFRS for SMEs (see Section A and Appendix F). Components of financial statements NPAEs financial statements do not include a statement of comprehensive income. SMEs financial statements shall include either a single statement of comprehensive income or two statements, i.e., a separate statement of income and a separate statement of comprehensive income.
Valuation of inventories The last-in, first-out (LIFO) method was allowed as an alternative valuation for inventories of NPAEs. The PFRS for SMEs does not include the LIFO method as an alternative inventory valuation method. Financial assets The terminologies, recognition and measurement principles, presentation and disclosures of financial assets allowed for NPAEs are very different from those required under the PFRS for SMEs. Financial assets of NPAEs were categorized as either marketable securities (current) that were measured at the lower of cost or market with the unrealized losses recognized in profit or loss; or marketable securities (noncurrent) that were measured at the lower of cost or market with the unrealized losses taken into the equity section of the balance sheet and other long-term investments that were accounted for under the equity method or the cost method. Disclosures required were minimum and not detailed.
SMEs, on the other hand, have the option to follow PAS 39, or the relevant provisions under the PFRS for SMEs (which are also based on PAS 39). Those requirements, while simplified for SMEs, are definitely more complex and detailed than those allowed the NPAEs under PAS 101. Borrowing costs NPAEs were allowed to capitalize borrowing costs attributable to qualifying assets. Borrowing costs incurred by SMEs are required to be charged to expense when incurred; capitalization of borrowing costs is not allowed. Income taxes There is no requirement for NPAEs to consider (and disclose) the effect of uncertain tax positions (i.e., possible outcomes of a review by tax authorities) on deferred tax accounts. The PFRS for SMEs requires an SME to measure deferred tax assets and liabilities at an amount that includes the possible effect of uncertain tax positions and to make the related disclosures in the financial statements.
Plant, property and equipment NPAEs were allowed to revalue plant, property and equipment (as an alternative to using the cost method). They were not required to de-componentize the fixed assets when computing depreciation. (Decomponentization refers to the process wherein major components of a fixed asset are identified, cost is allocated to such components, and the components are depreciated over their specific useful lives.) The PFRS for SMEs eliminates the revaluation method as an alternative measurement of property, plant and equipment of SMEs. It requires decomponentization for purposes of depreciation computation. Goodwill and other intangible assets For NPAEs, goodwill arising from business combinations (as well as other intangible assets) was allowed to be amortized over a period of 20 years unless the use of a useful life of more than 20 years could be justified. For SMEs, goodwill and other intangibles qualifying for recognition are also allowed to be amortized; amortization period is over the estimated useful life, or ten years if useful life cannot be estimated.
Consolidated financial statements Minority interests were presented in the consolidated financial statements of an NPAE between the liability section and the equity section of the balance sheet. Under the PFRS for SMEs, non-controlling interests (the new term for minority interests) are presented under the equity section of the statements of financial position. Investments in associates Investments in associates were required to be accounted for under the equity method in consolidated financial statements of an NPAE. Under the PFRS for SMEs, there are options in the measurement of investments in associates in consolidated financial statements: cost model, equity model and the fair value model.
Interests in joint ventures NPAEs were allowed to carry interests in joint ventures using the proportionate consolidation method or the equity method. The PFRS for SMEs does not allow proportionate consolidation in accounting for interests in joint ventures. Options allowed are the same as in accounting for investments in associates as presented above.
I.
What specialized activities are covered in the PFRS for SMEs?

Section 34 of the PFRS for SMEs deals with the following specialized activities: a. agriculture b. extractive activities c. service concession arrangements In relation to agricultural activity, the PFRS for SMEs requires fair value to be used for biological assets where fair value is readily determinable without undue cost or effort. All other biological assets are accounted for at cost. The pronouncements effective as of December 31, 2004 applied by most NPAEs did not include standards that deal with the above specialized activities.
J.
How will entities transition to the PFRS for SMEs?

The default position under the PFRS for SMEs is that an entity shall, in its opening statement of financial position as of its date of transition (being the beginning of the earliest period for which the entity presents full comparative information): a. recognize all assets and liabilities whose recognition is required by the PFRS for SMEs; b. not recognize items as assets or liabilities if the PFRS for SMEs does not permit such recognition; c. reclassify items that it recognized under its previous financial reporting framework as one type of asset, liability or component of equity, but are now a different type of asset, liability or component of equity under the PFRS for SMEs; and d. apply the PFRS for SMEs in measuring all recognized assets and liabilities. The accounting policies that an entity uses in its opening statement of financial position prepared in accordance with the PFRS for SMEs may differ from those that it used for the same date using its previous financial reporting framework. The transition to the PFRS for SMEs, therefore, will result in adjustments that arise from transactions, other events or conditions that occurred before the date of transition to the PFRS for SMEs; such adjustments are recognized directly in retained earnings (or, if appropriate, another category of equity) at the date of transition to the PFRS for SMEs. The PFRS for SMEs does, however, contain certain exemptions and simplifications that apply only to a first-time adopter of the PFRS for SMEs. (An entity is a first-time adopter where it prepares its annual financial statements in accordance with the PFRS for SMEs for the first time, regardless of whether its previous accounting framework was full PFRSs or another set of accounting framework.)
Areas where retrospective application is prohibited On first-time adoption of the PFRS for SMEs, an entity shall not retrospectively change the accounting that it followed under its previous financial reporting framework for any of the following transactions: derecognition of financial assets and financial liabilities hedge accounting accounting estimates discontinued operations measuring non-controlling interests Optional exemptions An entity may use one or more of a number of exemptions in preparing its first financial statements that conform to the PFRS for SMEs. These exemptions are similar to those contained in PFRS 1, Firsttime Adoption of Philippine Financial Reporting Standards. Disclosure on first-time adoption In order to explain the process of transition, the PFRS for SMEs contains requirements for a firsttime adopter to disclose a number of reconciliations to its most recent financial statements prepared under its previous financial reporting framework.
If it is impracticable for an entity to restate the opening statement of financial position at the date of transition in accordance with the requirements of the PFRS for SMEs, the entity shall apply the procedures for preparing financial statements at the date of transition in the earliest period for which it is practicable to do so, and shall identify the data presented for prior periods that are not comparable with the data that conforms to the PFRS for SMEs. Philippine SEC implementation guidelines A number of issues have emerged regarding transitioning of entities to the PFRS for SMEs. Entities that need to transition to the PFRS for SMEs generally will fall under one of the following categories: Entities that previously qualified as NPAEs and used PAS 101 now qualify as SMEs; these entities will transition from PAS 101 to the PFRS for SMEs. Entities that previously qualified as NPAEs and used PAS 101 now do not qualify as SMEs because they crossed the ceiling for the size criteria for SMEs; these entities will transition from PAS 101 to the full PFRS.
Entities that previously qualified as NPAEs but opted to use full PFRS now qualify as SMEs; these entities (with the exception of entities that are exempted by the SEC from the mandatory adoption of the PFRS for SMEs) will transition from the full PFRS to the PFRS for SMEs. Entities that did not previously qualify as NPAEs because they exceeded the size criteria and, hence, used the full PFRS, now qualify as SMEs because of the higher ceiling for the size criteria for SMEs; these entities will transition from the full PFRS to the PFRS for SMEs. Entities that did not qualify as NPAEs and used other nonPFRS-based financial reporting frameworks (such as cash or modified cash basis and tax basis) now qualify as SMEs; these entities shall transition from their previous non-PFRS-based financial reporting frameworks to the PFRS for SMEs. To address the more important emerging issues on the adoption of the PFRS for SMEs, especially on the transition to the PFRS for SMEs, the SEC, in a Commission En Banc meeting on February 4, 2010, adopted some implementation guidelines. Presented in Appendix E is a copy of the full SEC Implementation Guidelines.
K.
What other guidance is included in the PFRS for SMEs?

The PFRS for SMEs includes some other sections: a. Glossary of Terms provides the definition of certain terms used in the PFRS for SMEs b. Derivation Table identifies the primary sources in full PFRS from which the principles in each section of the PFRS for SMEs were derived c. Basis for Conclusion provides the discussions and various considerations made in coming out with the conclusions adopted in the PFRS for SMEs d. Illustrative Financial Statements includes a complete set of illustrative financial statements prepared in accordance with the PFRS for SMEs to illustrate major aspects of the standard e. Presentation and Disclosure Checklist summarizes the presentation and disclosure requirements throughout the PFRS for SMEs
Views from the experts
L.
P&A concluding comment
P&A welcomes the publication of the PFRS for SMEs. We believe there is a strong demand from this sector for an international approach to reporting that is less onerous than full PFRS. We also believe that users of financial information in the non-publicly accountable sector do not have the same requirements as users of listed company financial statements. The introduction of an international approach to the accounting for entities in this sector should bring credibility to their financial statements as banks and other financial institutions take comfort in the fact that an internationally recognized set of standards is being applied by these smaller entities. While the cost of preparing general purpose financial statements using the PFRS for SMEs means that it may not be suitable for very small entities, we expect the standard to be beneficial for many other companies in the non-publicly accountable sector.
As mentioned earlier, the SEC requires mandatory application of the PFRS for SMEs by entities qualifying as SMEs save for those SMEs that were given exemption by the SEC (see Section A and Appendix F). Hence, SMEs that presently use the full PFRS will have to transition to the PFRS for SMEs to comply with such SEC requirement. We have indicated that such mandatory requirement is somewhat restrictive and we believe giving the SMEs the option to adopt the full PFRS is a more appropriate approach to implementing the new standard. The SECs move to allow more exemptions from the mandatory adoption of the PFRS for SMEs is a welcome development. However, unless the concerned SMEs fall clearly under those exempt situations, we advise them to apply the PFRS for SMEs to avoid any possible sanctions for noncompliance.
Potential benefits Potential benefits of adopting the PFRS for SMEs are many, among others: improved access to capital improved quality and comparability of reporting facilitates cross-border trading focused on the needs of users of SME financial statements audit efficiencies stability initial two-year comprehensive review followed by three-yearly omnibus update eases burden where the full PFRS was previously required stepping stone to full PFRS for private entities aiming for an Initial Public Offering
Challenges of adopting PFRS for SMEs On the other hand, there are challenges that come with adopting the PFRS for SMEs. As noted above, the IASB took a cost-benefit approach in developing the standard. Nevertheless, converting to new accounting principles always involves some degree of financial and resource cost, which can sometimes be harder for smaller companies to handle. These costs need to be carefully considered by companies that are adopting the PFRS for SMEs. Challenges that private businesses may face include:
Learning new terminology and accounting techniques
New concepts
Valuation issue
For companies that have used a financial reporting framework that is not based on PFRS, some of the terminology and concepts in the PFRS for SMEs may be unfamiliar: for example, the need to apply fair value accounting for some transactions, to prepare a statement of cash flows or to consolidate subsidiaries.
While the PFRS for SMEs has attempted to limit the use of fair value to situations where the benefits from its use outweigh the costs, the use of fair values under the PFRS for SMEs may still be more widespread than under a financial reporting framework that is not based on PFRS. For example, the requirement to recognize an expense for share-based payments based on the fair value of the instruments provided will be a new concept to smaller entities. The use of a valuation expert may be necessary in some situations in order to arrive at the fair value.
Businesses and their advisers will have to learn new terminology and accounting techniques and make changes to their information systems and accounting software. Management reporting processes may need to be reviewed. Businesses may need to collect additional data about some of their transactions.
Potential areas of impact Changing to the PFRS for SMEs may have an effect on the actual operations of the company. Potential areas of impact include:
Distributable profits
Impact on loan covenants
As the profits available for distribution are not the same as the accounting profits, consideration will need to be given to the impact of any changes resulting from adopting the PFRS for SMEs. For example, the effect of items that are accounted for at fair value through profit or loss is considered a reconciling item in determining the amount of retained earnings available for distribution under an SEC rule.
Tax
In decision making, consideration will need to be given to the effect of adopting the PFRS for SMEs (changes in gearing, etc.) on loan covenants and other agreements with borrowers. Where the PFRS for SMEs is to be adopted, more detailed study, planning and analysis will need to be made relating to the transition to the new standard. For example, advance planning may be required to gather the information needed for prior years that will be presented as comparatives in the financial statements and the opening balance sheet at the start of the earliest comparative period presented.
For a number of SMEs using another basis for reporting taxable income (such as cash basis or tax basis), a move away from such basis will have tax implications. Where this is the case, in decision making, consideration will need to be given to the effect on cash payments and future tax planning.
Assistance from P&A
Should you have any questions or should you need assistance on matters covered in this Accounting Alert, please contact the P&A engagement partner assigned to your company, or send an e-mail to any of the following partners of the Firm: Marivic Espao, Managing Partner & COO Marivic.Espano@ph.gt.com Jun Cuaresma, Head - Audit & Assurance Division Jun.Cuaresma@ph.gt.com Dally Duque, Head - Audit Technical Group Dally.Duque@ph.gt.com Mabel Comedia, Partner - Audit Technical Group Mabel.Comedia@ph.gt.com Copies of the PFRS for SMEs can be downloaded from the IASB website at www.iasb.org. Copies of this Accounting Alert can be downloaded from the P&A website at www.punongbayanaraullo.com. Hardcopies can be obtained from P&A at the 20th Floor, Tower 1, The Enterprise Center, 6766 Ayala Avenue, Makati City.
Appendices Appendix A: Appendix B: Appendix C: Preface to PFRS for SMEs issued by the FRSC Philippine Accounting Standard 101 SEC Notice dated December 11, 2009 on the adoption of PFRS for SMEs as part of the SEC rules and regulations Snapshot of the PFRS for SMEs SEC Notice dated February 9, 2010 providing the Implementation Guidelines to address certain issues on the adoption of the PFRS for SMEs SEC Notice dated October 11, 2010 providing exemption from mandatory adoption of PFRS for SMEs
Pages 30 32
38 40
Appendix D: Appendix E:
44
Appendix F
48
Appendix A
Preface to Philippine Financial Reporting Standard for Small and Medium-sized Entities (PFRS for SMEs)
1. The Financial Reporting Standards Council (FRSC) approved on 13 October 2009, the adoption of International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs) issued by the International Accounting Standards Board (IASB), as Philippine Financial Reporting Standard for Small and Medium-sized Entities (PFRS for SMEs). Scope of PFRS for SMEs 2. The IASB describes SMEs as entities that (a) do not have public accountability, and (b) do not publish general purpose financial statements for external users. (See Section 1 of the PFRS for SMEs.) An entity has public accountability if: a. its debt or equity instruments are traded in a public market or it is in the process of issuing such instruments for trading in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local and regional markets), b. it holds assets in a fiduciary capacity for a broad group of outsiders as one of its primary businesses. This is typically the case for banks, credit unions, insurance companies, securities brokers/dealers, mutual funds and investment banks. 3. The IASB, however, recognizes that many jurisdictions around the world have developed their own definitions of SMEs for a broad range of purposes including prescribing financial reporting obligations. Often those national or regional definitions include quantified criteria based on revenue, assets, employees or other factors.
4. In the Philippines, the PFRS for SMEs shall be used by entities that meet the definition of an SME as set forth in the Securities and Exchange Commission (SEC) En Banc Resolution dated 13 August 2009. The SEC defines an SME for financial reporting only as an entity: a. With total assets between P3 Million and P350 Million or total liabilities of between P3 Million and P250 Million; b. That is not required to file financial statements under SRC Rule 68.1; c. That is not in the process of filing its financial statements for the purpose of issuing any class of instruments in a public market; d. That is not a holder of a secondary license issued by a regulatory agency, such as a bank (all types of banks), an investment house, a finance company, an insurance company, a securities broker/dealer, a mutual fund and a pre-need company; and e. That is not a public utility.
Effective Date and T ransition Transition 5. An entity that meets the definition of an SME in paragraph 4 above shall apply the PFRS for SMEs for annual periods beginning on or before 1 January 2010. However, the guidance for applying the requirements of Section 23, Revenue, in recognizing revenue from agreements for the construction of real estate set forth in paragraph 23A.14 and 23A.15 shall apply for annual periods beginning on or after 1 January 2012. 6. The amount of total assets and total liabilities stated in paragraph 4(a) above shall be based on the audited financial statements as of 31 December 2009.
7. An entity that applies the PFRS for SMEs for the first time (i.e., a first-time adopter of the PFRS for SMEs) shall apply the transition provisions in Section 35 of the PFRS for SMEs. A first-time adopter of the PFRS for SMEs is an entity that presents its first annual financial statements that conform to the PFRS for SMEs, regardless of whether its previous accounting framework was full PFRS or another set of accounting standards (e.g., the standards set forth in PAS 101, Financial Reporting Standards for Non-Publicly Accountable Entities). Withdrawal of P AS 101 PAS 8. PAS 101 is hereby withdrawn.
FRSC Members Carlos R. Alindada, Chairman Romeo C. Alba Eugene Mateo/ Ma. Elenita B. Cabrera Ester F. Ledesma Alfredo B. Parungao Maximo C. Roque Jr. Thaddeus E. Venturanza/ Ma. Gracia Casals-Diaz Ma. Violeta V. Vicente Ma. Dolores B. Yuvienco
The Preface to PRFS for SMEs was subsequently amended to allow the early adoption of the PFRS for SMEs by SMEs that are capable, in terms of systems and resources, to efficiently transition to the new standard for their financial statements as of that earlier date.
Appendix B
Philippine Accounting Standard (PAS) 101

(Withdrawn in October 2009 when FRSC approved the adoption of the PFRS for SMES -- see Appendix A)
Financial R epor ting Standards for Non-publicly Accountable Entities Repor eporting
Contents Paragraphs
Introduction Objective Qualifying entities Option available to qualifying entities Financial Reporting Standards applicable to qualifying entities Disclosure Effective date Appendix Financial reporting standards effective as of December 2004 applicable to qualifying entities Approval of PAS 101 by the ASC
1-5 6 7-10 11-13 14 15 16
Philippine Accounting Standard 101

Financial Reporting Standards for Non-publicly Accountable Entities
Introduction 1. The Accounting Standard Council (ASC), in line with the accounting professions objective to converge Philippine accounting standards with international accounting standards, issued a number of new accounting standards, referred to as Philippine Financial Reporting Standards (PFRSs) that became effective in 2005. The adoption of the new accounting standards was approved by the Securities and Exchange Commission (SEC), the Board of Accountancy (BOA) and Professional Regulation Commission (PRC); and the Bangko Sentral ng Pilipinas (BSP). The PFRSs were intended at that time to be applicable to all reporting entities that prepared financial statements in conformity with generally accepted accounting principles in the Philippines. 2. Considering the significant number of small and medium-sized entities (SMEs) in the Philippines, the ASC has considered providing a temporary relief to SMEs in the application of the new standards. 3. The ASC plan was given impetus by the decision of the International Accounting Standards Board (IASB) in 2005 to undertake a project to develop accounting standards suitable for entities that (1) do not have public accountability and (2) publish general purpose financial statements for external users (e.g., owners who are not involved in managing the business, existing and potential creditors, and credit rating agencies). The IASB refers to this group of entities as Non-Publicly Accountable Entities, or NPAEs. The IASB has decided to use the term non-publicly accountable entities, rather than small and medium-sized entities because the latter term has different meanings around the world.
4. Under the IASB project, an entity has public accountability if: it has filed, or it is in the process of filing, its financial statements with a securities commission or other regulatory organization for the purpose of issuing any class of instruments in a public market; it holds assets in a fiduciary capacity for a broad group of outsiders, such as a bank, insurance company, securities broker/dealer, pension fund, mutual fund or investment banking entity; it is a public utility or similar entity that provides an essential public service; or it is economically significant in its home country on the basis of criteria such as total assets, total income, number of employees, degree of market dominance, and nature and extent of external borrowings. 5. The IASB expects to issue an exposure draft on accounting by NPAEs in March 2006 and the final standard in 2007.
Objective 6. The objective of this Standard is to provide temporary relief in the application of the new PFRSs that became effective in 2005 to entities that are covered by this Standard. The Standard identifies which entities are covered, provides an option to these entities in the application of the new PFRSs, and specifies the financial reporting standards applicable to these entities. 7. This Standard shall be applied in the general purpose financial statements prepared and presented by an entity with no public accountability. An entity has public accountability: a. if it is required to file financial statements under SEC Rule 68.1, Special Rule on Financial Statements of Reporting Companies under Section 17.2 of the Securities Regulation Code. Under the SEC rules, these would include: 1. an issuer which has sold a class of their securities pursuant to a registration under Section 12 of the Code; 2. an issuer with a class of securities listed for trading on an Exchange; and
3. an issuer with assets of at least P50 million and having 200 or more holders each holding at least 100 shares of a class of its equity securities as of the first day of the issuers fiscal year; b. if it is in the process of filing its financial statements for the purpose of issuing any class of instruments in a public market; c. if it holds assets in a fiduciary capacity for a broad group of outsiders, such as a bank (all types of banks), an investment house, a finance company, an insurance company, a securities broker/dealer, a mutual fund and a pre-need company; d. if it is a public utility or similar entity that provides an essential public service; e. if it is economically significant, as described in paragraph 8; or
f. if it is considered by its primary regulator to have public accountability. 8. For purposes of paragraph 7(e), an entity is considered economically significant if it exceeds either of the following: total assets of P250 million or total liabilities of P150 million. The total assets and total liabilities are based on the entitys annual financial statements and on consolidated totals, if the entity presents consolidated financial statements. 9. The criteria for an economically significant entity are arbitrary and will be reviewed when the IASB has issued its final standard on NPAEs or earlier if necessary. 10. For purposes of this Standard, an entity that is a subsidiary of a parent that is considered to have public accountability under paragraph 7 is similarly considered to have public accountability.
Option A vailable to Qualif ying Available Qualifying Entities 11. A qualifying entity under this Standard is allowed not to apply in its general purpose financial statements the new PFRSs that became effective in 2005. 12. A qualifying entity, however, may still choose to apply any or all of the new PFRSs. 13. An entity that has public accountability, as provided in paragraphs 7 and 10, is required to apply the new PFRSs in its financial statements for 2005, unless its primary regulator issues a pronouncement exempting the entity from applying a new standard or certain provisions of a new standard.
Financial R epor ting Standards Repor eporting Applicable to Qualif ying Entities Qualifying 14. A qualifying entity under this Standard that chooses to avail of the option not to apply the new PFRSs shall apply the applicable financial reporting standards effective as of December 2004 in preparing its general purpose financial statements. The Appendix lists these standards. Disclosure 15. A qualifying entity shall disclose the basis of preparation of its financial statements and the specific accounting policies used.
Effective Date 16. A qualifying entity shall apply this Standard for annual periods beginning on or after January 1, 2005. The Standard shall be effective for 2005 to 2007, unless revoked earlier.
The effectivity of PAS 101 was extended from 2007; it was withdrawn only in October 2009 when the PFRS for SMEs was adopted by the FRSC.
Appendix
Financial Reporting Standards Effective as of December 2004 Applicable to Qualifying NPAEs under PAS 101
Framework for the P reparation and P resentation of F inancial Statements Preparation Presentation Financial
SFAS 1 (rev) SFAS 4 (rev) SFAS 8 SFAS 8A SFAS 10 SFAS 13 (rev) Presentation of Financial Statements Inventories Accounting for the Effects of Changes in Foreign Exchange Rates Deferral of Foreign Exchange Differences (an amendment of SFAS 8) Summary of Generally Accepted Accounting Principles on Investments Net Profit or Loss for the Period, Fundamental Errors and Changes in Accounting Policies Summary of Generally Accepted Accounting Principles on Stockholders Equity Cash Flow Statements Retirement Benefit Costs Borrowing Costs Construction Contracts Revenue Events After the Balance Sheet Date Income Taxes Property, Plant and Equipment Leases Accounting for Government Grants and Disclosure of Government Assistance Business Combinations Related Party Disclosures Accounting and Reporting by Retirement Benefit Plans Consolidated Financial Statements and Accounting for Investments in Subsidiaries Accounting for Investments in Associates Financial Reporting of Interests in Joint Ventures Discontinuing Operations Impairment of Assets Provisions, Contingent Liabilities and Contingent Assets Intangible Assets
SFAS 18 SFAS 22 (rev) SFAS 24 SFAS 25 SFAS 26 SFAS 28 SFAS 10/IAS 10 SFAS 12/IAS 12 SFAS 16/IAS 16 SFAS 17/IAS 17 SFAS 20/IAS 20 SFAS 22/IAS 22 SFAS 24/IAS 24 SFAS 26/IAS 26 SFAS 27/IAS 27 SFAS 28/IAS 28 SFAS 31/IAS 31 SFAS 35/IAS 35 SFAS 36/IAS 36 SFAS 37/IAS 37 SFAS 38/IAS 38
Approval of P AS 101 by the ASC PAS The Accounting Standards Council (ASC) has approved in October 2005 the issuance of Philippine Accounting Standard (PAS) 101, Financial Reporting Standards for Nonpublicly Accountable Entities.
ASC Members Carlos R. Alindada, Chairman Romeo C. Alba Nestor A. Espenilla Jr./ Ma. Dolores B. Yuvienco Roberto G. Manabat Eugene T. Mateo Alfredo Parungao Maximo C. Roque Violeta V. Vicente
Appendix C REPUBLIC OF THE PHILIPPINES Department of Trade and Industry SECURITIES AND EXCHANGE COMMISSION SEC Building, EDSA, Greenhills, Mandaluyong City
NOTICE
Notice is hereby given that the Commission En Banc in its meeting of 03 December 2009 resolved to adopt the Philippine Financial Reporting Standards for Small and Medium Entities (PFRS for SMEs) as part of its rules and regulations. The PFRS for SMEs were adopted on 13 October 2009 by the Philippine Financial Reporting Standards Council form the International Financial Reporting Standards (IFRS) for Small and Medium Entities by the International Accounting Standards Board. In this PFRS for SMEs, many of the principles in full Philippine Financial Reporting Standards (PFRS) for recognizing and measuring assets, liabilities, income and expenses have been simplified, topics that are not relevant to small and medium entities (SMEs) have been omitted, and the required disclosures have been significantly reduced. As the PFRS for SMEs is a stand-alone standard, it includes a section on concepts and pervasive principles that underlie the financial statements of SMEs. These concepts address various issues including the objective of financial statements for SMEs, the qualitatitve characteristics of information contained in those financial statements, and general recognition and measurement principles. A complete set of financial statements of an entity reporting under the PFRS for SMEs is similar to that provided for by full PFRS. It requires the following documents: 1. A statement of financial position; 2. Either a single statement of comprehensive income, or a separate income statement and a separate statement of comprehensive income; 3. A statement of changes in equity; 4. A statement of cash flows; 5. Notes including a summary of significant accounting policies. Comparative information in respect of the previous comparable period must be included, although an opening statement of financial position is not needed in the instances described by PAS 1, Presentation of Financial Statements. The PFRS for SMEs includes a set of illustrative financial statements and a presentation and disclosure checklist to assist entities in the preparation of their financial statements. PFRS for SMEs has transition rules that apply equally to all entities on first-time adoption of the standards. The transition rules are based on the requirements of PFRS 1, First-time Adoption of International Financial Reporting Standards but, in certain cases, the standard has been designed to make the transition rules simpler to apply.
PFRS for SMEs shall cover corporations that: a. Have total assets of between P3 Million and P350 Million or total liabilities of between P3 Million and P250 Million; b. Are not required to file financial statements under SRC Rule 68.1; c. Are not in the process of filing their financial statements for the purpose of issuing any class of instruments in a public market; d. Are not holders of secondary licenses issued by a regulatory agency, such as banks, investment houses, finance companies, insurance companies, securities brokers/dealers, mutual funds and pre-need companies; and e. Are not public utilities. Entities that meet all of the foregoing criteria shall apply PFRS for SMEs for annual periods beginning 01 January 2010. Copies of the PFRS for SMEs are available at the offices of the Philippine Institute of Certified Public Accountants. Issued this 11th day of December 2009, Mandaluyong City, Philippines.
For the Commission:
FE B. BARIN Chairperson
Appendix D
Snapshot of the PFRS for SMEs
Section No . No.
1
Title
Small and Medium-sized Entities (SMEs)
Description
Defined as entities that (a) do not have public accountability, and (b) publish general purpose financial statements for external users. Major concepts and basic principles underlying the financial statements of SMEs, such as definitions of assets, liabilities, income and expenses. A complete set of financial statement comprises: a. a statement of financial position; b. either a single statement of comprehensive income, or separate income statement and a separate statement of comprehensive income; c. a statement of changes in equity; d. a statement of cash flows; and e. notes, comprising a summary of significant accounting policies, other explanatory information, and comparatives.
Concepts and Pervasive Principles
Financial Statement Presentation
Statement of Financial Position
A Statement of Financial Position consists of certain minimum line items. These items are classified as either current or non-current unless a presentation based on the liquidity of the items provides information that is more reliable and relevant. Total comprehensive income is presented in either a single statement of comprehensive income or in two statements (an income statement and a statement of comprehensive income). Changes in an entitys equity for a period are presented either in a statement of changes in equity or, if certain conditions are met and an entity chooses, in a statement of income and retained earnings. A statement of income and retained earnings can be used where the only changes to the entitys equity during the period arise from profit or loss, payment of dividends, corrections of prior period errors, and changes in accounting policy.
Statement of Comprehensive Income and Income Statement
Statement of Changes in Equity and Statement of Income and Retained Earnings
Statement of Cash Flows
Changes in cash and cash equivalents are reported, showing separately changes from operating activities, investing activities and financing activities.
Section No . No.
8
Title
Notes to the Financial Statements
Description
Significant accounting policies are disclosed, together with details of judgments made and key sources of estimation uncertainty. A parent entity is required to present consolidated financial statements in which all its subsidiaries are included. There are some limited exceptions to this rule. Prior period errors are accounted for on a retrospective basis. Changes in accounting estimates are recognized prospectively. Changes in accounting policy are accounted for on a retrospective basis unless specific transitional provisions apply.
Consolidated and Separate Financial Statements
10
Accounting Policies, Estimates and Errors
11
Basic Financial Instruments
An amortized cost or cost less impairment model is used for basic financial instruments such as cash, loans and trade receivables and payables. Other financial instruments are generally measured at fair value through profit or loss. Examples of such instruments include asset backed securities, options, futures contracts, forward contracts, and interest rate swaps. Hedge accounting is permitted only for certain specific types of risk. Certain conditions must be met in order to use hedge accounting.
12
Other Financial Instruments Issues
13
Inventories
Inventories are measured at the lower of cost and net realizable value. Investments in associates are measured using any of the following: The cost model (cost less accumulated impairment); The equity model (initial recognition at cost, with subsequent adjustments to reflect the investors share of the profit or loss and other comprehensive income of the associate); or The fair value model (compulsory where a published price exists for the investment).
14
Investments in Associates
15
Investments in Joint Ventures
An accounting policy election similar to that for associates applies to investments in joint ventures. Proportionate consolidation is not permitted. Investment property with fair value that can be measured reliably without undue cost or effort is accounted for at fair value through profit or loss. Otherwise investment property is accounted for at cost less depreciation and impairment. Property, plant and equipment are measured at cost less depreciation and impairment.
16
Investment Property
17
Property, Plant and Equipment
Section No . No.
18
Title
Intangible Assets other than Goodwill
Description
All internally developed intangibles, including all research and development activities, are expensed as incurred. Acquired intangibles meeting the criteria for recognition are capitalized as assets and measured at cost less amortization and impairment. All intangible assets are considered to have a finite useful life. Revaluation of intangible assets is not permitted.
19
Business Combinations and Goodwill
Goodwill is measured at cost less amortization and impairment. Where an entity is unable to make a reliable estimate of the useful life of goodwill, its life is presumed to be ten years and amortized over that period. Finance leases are recognized as an asset by the lessee. Lease payments under operating leases are recognized by the lessee as an expense. Classification of leases depends on the substance of the transaction rather than the form of the contract.
20
Leases
21
Provisions and Contingencies
Present obligations are recognized as provisions when there is a probable outflow of economic benefits and the amount of the obligation can be estimated reliably. Contingent liabilities and contingent assets are not recognized but are disclosed in the notes.
22
Liabilities and Equity
Equity is the residual interest in the assets of an entity after deducting all its liabilities. A financial liability is a present obligation of the entity arising from past events, which is expected to result in an outflow of economic benefits. Split accounting must be applied to compound financial instruments (such as convertible debt), which contain both a liability and an equity component.
23
Revenue
For the sale of goods, revenue is recognized on transfer of the significant risks and rewards of ownership. In most cases, this will coincide with the transfer of legal title or the passing of possession to the buyer. For services and construction contracts, revenue is recognized according to the stage of completion at the end of the reporting period. Interest and royalties receivable are recognized on an accrual basis. Dividends are recognized when the right to receive the payment is established.
24
Government Grants
Government grants are recognized in income when any specified performance conditions have been met. Where there are no such conditions, the grant is recognized in income upon receipt.
Section No . No.
25
Title
Borrowing Costs Share-based Payment
Description
All borrowing costs are expensed as incurred. Employee share awards and share options are recognized as an expense in profit or loss over the vesting period. A corresponding credit is recognized in equity. These amounts are measured at the fair value of the instruments provided. An impairment loss is recognized when the carrying amount of an asset exceeds its recoverable amount. Contributions payable under defined contribution plans are recognized as expenses in the period in which they are due. For defined benefit pension plans, an entity recognizes a liability for its obligations net of the plans assets. The net change in the liability during the period is recognized as the cost of the plan during the period. Entities can choose to recognize all actuarial gains and losses in either profit or loss or in other comprehensive income.
26
27
Impairment of Assets
28
Employee Benefits
29
Income Tax
Deferred tax is calculated using a temporary difference approach based on the difference between the carrying amount of an asset and its tax base. Foreign currency transactions are translated into the functional currency of the reporting entity. All monetary items and those non-monetary items that are measured at fair value are subsequently retranslated at the end of each reporting period. Entities subject to hyperinflation are required to state all amounts at the prices that are current at the end of the reporting period. Adjustment is made for events that provide evidence of conditions that existed at the end of the reporting period. No adjustment is made for events that are indicative of conditions that arose after the end of the reporting period, although they are disclosed.
30
Foreign currency Translation
31
Hyperinflation
32
Events after the End of the Reporting Period
33
Related Party Disclosures
Disclosures draw attention to the existence of related parties and transactions and balances with such parties. Guidance is provided for three types of specialized activities agriculture, extractive activities and service concessions. Mandatory exceptions to and optional exemptions from the full requirements of the IFRS for SMEs enable the Standard to be applied more easily by entities adopting it for the first time.
34
Specialized Activities
35
Transition to the IFRS for SMEs
Appendix E REPUBLIC OF THE PHILIPPINES Department of Trade and Industry SECURITIES AND EXCHANGE COMMISSION SEC Building, EDSA, Greenhills, Mandaluyong City
NOTICE
The Commission En Banc, in its meeting of 04 February 2010, resolved to adopt the following Implementation Guidelines to address certain issues on the adoption of the Philippine Financial Reporting Standards (PFRS) for Small and Medium Entities (SMEs): 1. Transition from full PFRS to PFRS for SMEs Some entities are currently using full PFRS either because they (a) opted to although they qualify as NonPublicly Accountable Entities (NPAE), or (b) are required to use full PFRS as they do not qualify as NPAE under PAS 101. These entities may now qualify as SMEs under the definitions in PFRS for SMEs and the 13 August 2009 SEC En Banc Resolution (the SEC Resolution). If they qualify and adopt the PFRS for SMEs, they shall be considered as first- time adopter of the PFRS for SMEs and, therefore, should apply Section 35 (Transition to the PFRS for SMEs). Paragraphs 35.1 and 35.2 of said section state that: 35.1 This section applies to a first-time adopter of the IFRS for SMEs, regardless of whether its previous accounting framework was full IFRS or another set of generally accepted accounting principles (GAAP) such as its national accounting standards, or another framework such as the local income tax basis. 35.2 An entity can be a first time adopter of the IFRS for SMEs only once. x x x
2. Transition of NP AEs from P AS 101 to PFRS to SMEs only NPAEs PAS NPAEs that are currently using PAS 101 may qualify as SMEs under the PFRS for SMEs and the SEC Resolution. If they qualify, they may use the PFRS for SMEs and will be considered as first-time adopter of the PFRS for SMEs and should apply paragraphs 35.1 and 35.2 thereof (Refer to Item 1 above.)
3. Transition of NP AEs from P AS 101 to full PFRS NPAEs PAS NPAEs that currently use PAS 101 may not qualify as SMEs under the PFRS for SMEs and the SEC Resolution (for example, entities that crossed the ceiling threshold for total assets of P350 million). NPAEs that currently use PAS 101 but (a) no longer qualify as SMEs under the PFRS for SMEs and the SEC Resolution, and (b) are not considered micro-business entities (i.e., entities whose total assets or total liabilities are below the P3 million floor threshold for the size criteria see item 4 below), should use the full PFRS. If this is the first time that such entities will adopt full PFRS, they should apply PFRS 1, First-time Adoption of Philippine Financial Reporting Standards.
4. Financial R epor ting F ramework of Entities now covered by either the full PFRS or PFRS for SMEs Repor eporting Framework Micro-business entities have the option to use any of these bases of accounting in the preparation of their financial statements: (a) full PFRS, (b) PFRS for SMEs, or (c) another acceptable basis of accounting.1 If the entity uses a basis of accounting other than full PFRS and the PFRS for SMEs in the preparation of its financial statements, its management shall assess the acceptability of such basis of accounting in the light of the nature of the entity and the objective of the financial statements, or the requirements of the law or regulators and standard-setter. By way of illustration, tax regulations permit taxpayers to use the income tax basis of accounting; on the other hand, the SEC allows the use of the cash basis of accounting by micro-business entities. 5. Date for applying the size criteria and for transitioning to full PFRS or to PFRS for SMEs The PFRS for SMEs shall be effective for annual periods beginning on or after January 1, 2010, except for the guidance in applying the requirements of Section 23 (Revenue) in recognizing revenue from agreements for the construction of real estate, which shall apply to annual periods beginning on or after January 1, 2012. As indicated in the Preface to the PFRS for SMEs, the amount of total assets and total liabilities shall be based on the entitys audited financial statements as of December 31, 2009. Thus, an SME whose accounting period begins on January 1, 2010 shall apply the size criteria based on the entitys audited total assets or audited total liabilities as of December 31, 2009. An SME whose accounting period begins on a date other than January 1, 2010 (i.e., it uses a fiscal year, for example, January 31, 2010 to January 31, 2011) shall apply the size criteria using the entitys audited financial statements for the immediately preceding fiscal year (i.e., for the fiscal year ending January 31, 2010).
Both the full PFRS and the PFRS for SMEs define what statements/disclosures shall be presented as part of a complete set of financial statements. These include a statement of financial position, a statement of comprehensive income for the period, a statement of changes in equity for the period, and a statement of cash flows for the period. In the absence of a similar definition of statements to be presented for another basis of accounting, the provisions of the full PFRS and PFRS for SMEs may be used as a guide. For example, if the basis of accounting is prescribed or permitted by a government regulatory agency and is substantially an accrual basis, the financial may include the same financial statements required under the full PFRS and the PFRS for SMEs. On the other hand, a separate statement of cash flows ordinarily is not needed when financial statements are prepared on a cash receipts and disbursements basis or an income tax basis that is essentially a cash basis. These bases already accommodate the equivalent of a cash flow statement presentation. Therefore, such presentations need not conform with the requirements for a statement of cash flows that would be included in a full PFRS or PFRS for SMEs presentation. For stock corporations with paid-up capital stock of more than P50,000.00, and non-stock corporations with total assets of more than P500,000.00 and total contributions of more than P100,000.00, the relevant requirements of SRC Rule 68 shall be complied with, particularly, the submission of a complete set of financial statements (i.e., Balance Sheet, Income Statement, Cash Flow Statement (if cash basis, non-mandatory), Statement of Changes in Equity/Fund Balance, Notes to Financial Statements), Statement of Managements Responsibility and Auditors Report.
If an SME that uses the PFRS for SMEs in the current year (for example, calendar year 2010) breaches the floor or ceiling of the size criteria at the end of that current year (i.e., December 31, 2010), and the event that caused the change is considered significant and continuing, the entity should transition to the applicable financial reporting framework (i.e., full PFRS if the ceiling threshold is breached, or another acceptable accounting basis if the floor threshold is breached) in the next accounting period (or calendar year 2011). If the event is not considered significant and continuing, the entity can continue to use the same financial reporting framework it currently uses. The determination of what is significant and continuing shall be based on managements judgment, taking into consideration relevant qualitative and quantitative factors. As a general rule, 20% or more of total assets or total liabilities would be considered significant. 6. Date for applying the size criteria if the PFRS for SMEs is adopted early If an entity opts to apply early the PFRS for SMEs (for example, in calendar year 2009), it shall apply the size criteria using the entitys audited financial statements for the immediately preceding calendar year (i.e., for the calendar year ended December 31, 2008). 7. Subsidiaries of a parent company that use full PFRS There are situations where a parent company that uses full PFRS has subsidiaries that qualify as SMEs under the PFRS for SMEs and the SEC Resolution. The subsidiaries that qualify as SMEs under the PFRS for SMEs and the SEC Resolution (such as they are not listed, have no public accountability, are not holders of secondary licenses from the SEC, etc.), may use the PFRS for SMEs even if their parent company uses full PFRS. Paragraph 1.6 of Section 1 of the PFRS for SMEs provides that: 1.6 A subsidiary whose parent uses full IFRS, or that is part of a consolidated group that uses the full IFRS, is not prohibited from using this IFRS in its own financial statements if that subsidiary by itself does not have public accountability. If its financial statements are described as conforming to the IFRS for SMEs, it must comply with all the provisions of this IFRS. One issue to consider, however, with regard to a subsidiary whose financial statements are consolidated into group financial statements is the requirement under the PFRS for SMEs and the full PFRS on the use by a group of uniform accounting policies. If a member of the group uses accounting policies other than those adopted in the consolidated financial statements for similar transactions and events under the same circumstances, appropriate adjustments should be made in the financial statements of that entity in the preparation of the consolidated financial statements.
8. Required disclosures If an SMEs first financial statements use the PFRS for SMEs, it shall make the required disclosures, which include an explanation of the transition to the PFRS for SMEs (under paragraphs 35.13 to 35.15) of Section 35 of the PFRS for SMEs. If an SME does not opt to make an early application of the PFRS for SMEs, it shall disclose the impact on its financial statements of the future adoption or application of the PFRS for SMEs. 9. Early adoption of PFRS for SMEs As earlier stated, PFRS for SMEs shall be effective for periods beginning January 1, 2010. Although the International Financial Reporting Standards for SMEs and the PFRS for SMEs do not provide for early adoption, the same may, however, be allowed for SMEs which are capable, in terms of systems and resources, to efficiently transition to PFRS for SMEs for their financial statements as of 31 December 2009, provided that such entities discuss in their financial statements the impact of such early adoption. If an SME is capable and opts to early adopt the PFRS for SMEs, it should be considered a first-time adopter of the PFRS for SMEs and, therefore, should apply Section 35 (Transition to the PFRS for SMEs). Issued this 9th day of February, 2010.
For the Commission:
FE B. BARIN Chairperson
Appendix F REPUBLIC OF THE PHILIPPINES Department of Trade and Industry SECURITIES AND EXCHANGE COMMISSION SEC Building, EDSA, Greenhills, Mandaluyong City
NOTICE
The Commission En Banc, in its meeting on 07 October 2010, resolved to exempt from the mandatory adoption of the Philippine Financial Reporting Standards for Small and Medium Entities (PFRS for SMEs) small or medium entities (SMEs) that meet any of the following criteria: 1. It is a subsidiary of a parent company reporting under full Philippine Financial Reporting Standards (full PFRS); 2. It is a subsidiary of a foreign parent company that will be moving towards International Financial Reporting Standards (IFRS) pursuant to the foreign countrys published convergence plan; 3. It is a subsidiary of a foreign parent company that has been applying the standards for a non-publicly accountable entity for local reporting purposes, and is considering moving to full PFRS intead of the PFRS for SMEs in order to align its policies with the expected move to full IFRS by its foreign parent company pursuant to its countrys published convergence plan; 4. It has short-term projections that show that it will breach the quantitative thresholds set in the criteria for an SME, and the breach is expected to be significant and continuing due to its long-term effect on the companys asset or liability size; 5. It is part of a group, either as a significant joint venture or an associate, that is reporting under full PFRS; 6. It is a branch office of a foreign company reporting under full IFRS; 7. It has concrete plans to conduct an initial public offering within the next two (2) years; 8. It has a subsidiary that is mandated to report under full PFRS; 9. It has been preparing financial statements using full PFRS and has decided to liquidate its assets. An SME that wants to avail of any of the foregoing grounds for exemption shall provide a discussion in its notes to financial statements of the facts supporting its adoption of full PFRS instead of PFRS for SMEs. October 11, 2010, Mandaluyong City, Philippines.
For the Commission: Fe B. Barin Chairperson
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2010 Accounting Alert - PFRS For SMEs

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2010 Accounting Alert - PFRS For SMEs

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Accounting Alert

Philippine Financial Reporting Standard for Small and Medium-sized Entities

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Assistance from P&A Appendices

To our valued clients and friends

Who can use the PFRS for SMEs?

Accounting Aler t: PFRS for SMEs Alert:

What are Small and Medium-sized Entities?

Accounting Aler t: PFRS for SMEs Alert:

Accounting Aler t: PFRS for SMEs Alert:

When does the PFRS for SMEs take effect?

What are the components of an SMEs financial statements?

Accounting Aler t: PFRS for SMEs Alert:

Accounting Aler t: PFRS for SMEs Alert:

PFRS for SMEs

Anticipated to be updated on a threeyearly basis

Accounting Aler t: PFRS for SMEs Alert:

Financial instruments (Sections 11 and 12)

Accounting Aler t: PFRS for SMEs Alert:

Accounting Aler t: PFRS for SMEs Alert:

In vestments in associa tes Inv associates (Section 14)

In vestment pr oper ty Inv proper operty (Section 16)

10 Accounting Aler t: PFRS for SMEs Alert:

Pr oper ty , plant and equipment Proper operty ty, (Section 17)

Accounting Aler t: PFRS for SMEs 11 Alert:

Bor r owing costs (Section 25) Borr

12 Accounting Aler t: PFRS for SMEs Alert:

Accounting Aler t: PFRS for SMEs 13 Alert:

14 Accounting Aler t: PFRS for SMEs Alert:

PFRS for SMEs

Other financial instruments issues

Investments in associates (in consolidated FS or in FS of investor that is not a parent)

Requires use of equity method of accounting

Investments in joint ventures (in consolidated FS or in FS of investor that is not a parent)

Accounting Aler t: PFRS for SMEs 15 Alert:

PFRS for SMEs

Property, plant and equipment

Requires use of the costdepreciation-impairment model No revaluation option

Intangible assets other than goodwill

Business combinations and goodwill

Goodwill is not amortized.

Goodwill is allocated and tested for impairment at a higher level.

16 Accounting Aler t: PFRS for SMEs Alert:

PFRS for SMEs

Post-employment defined benefit plans

Accounting Aler t: PFRS for SMEs 17 Alert:

18 Accounting Aler t: PFRS for SMEs Alert:

Accounting Aler t: PFRS for SMEs 19 Alert:

20 Accounting Aler t: PFRS for SMEs Alert:

What specialized activities are covered in the PFRS for SMEs?

How will entities transition to the PFRS for SMEs?

Accounting Aler t: PFRS for SMEs 21 Alert:

22 Accounting Aler t: PFRS for SMEs Alert:

What other guidance is included in the PFRS for SMEs?

Accounting Aler t: PFRS for SMEs 23 Alert:

Views from the experts

P&A concluding comment

Accounting Aler t: PFRS for SMEs 25 Alert:

26 Accounting Aler t: PFRS for SMEs Alert:

Impact on loan covenants