CHAPTER 20

SMEs - QUALITIES AND GENERAL FEATURES

OBJECTIVE OF FINANCIAL STATEMENTS

Ang objective ng financial statements isang SME is magprovide ng information
about sa financial position and perfomance ng entity and its cash flow to help the
financial users in making economic decisions na gagawin ng broad range of users
na wala sa position to demand reports tailored to meet their particular information
needs.
QUALITATIVE CHARACTERISTICS
o Understandability
o Relevance
o Materiality
o Reliability
o Substance over form
o Prudence
o Completeness
o Comparability
o Timeliness
o Balance between benefit and cost

Understandability
For the financial information to be useful kailangan ay naiintindihan. So, the
financial information must be comprehensible or intelligible. At para ito ay
maindihan ng users ay dapat na mai-present ito in a form na maiintidihan.
However, ang financial reports ay prepared para sa mga users na may reasonable
knowledge sa business and they could analyze that information diligently.

Relevance
An information is said to be relevant if it can affect or influence the economic
decision of the users. Relevance requires that the financial information should be
related or pertinent to an economic decision.
Materiality
Ang materiality ay isang practical rule sa accounting kung saan it dictates na ang
strict adherence sa GAAP ay hindi required in case na insignificant ang effect nito
sa evaluation and fairness ng financial statements.
Ang information is said to be material kung ang omission or misstatement nito ay
makakaapekto sa economic decision ng financial users.

Reliability
Ang information is said to be reliable kung it can assure na ang information ay free
from bias and error, and faithfully represents what it purports to represent. Ibig
sabihin, masasabi natin reliable ang isang information kung ang isang user ay
mayroong degree of confidence about sa truthfulness ng representation ng
financial statements.
Substance over form
Substance over form means that kung may conflict between sa economic
substance ng isang transaction at legal form nito, ang economic substance shall
prevail.
Prudence

Prudence ay ang desire na mag-exercise ng care and caution when dealing with
uncertainties sa measurement process. Ang prudence ay synonyms ng
“conservatism”, so ibig sabihin, in case of doubt it is much better to record the loss
rather than gain, you must not record any gain.

Completeness

For the information to be complete, dapat ang relevant information ay dapat na

i-present in a way na maiintindihan and avoid erroneous implication.

For the financial statements to be completed, this must have “notes to financial
statements”.

Comparability

Comparability means it has the ability na i-put together para sa purpose na

mai-note ang likeness and difference ng information. This may be made within an
entity or between and across entities.

Timeliness

If the financial information is furnished after the decision is made it is now useless
or of no value. So ibig sabihin nito, dapat available ang financial information in
time to influence an economic decision. It must be communicated to the users
early enough when decision is to be made.

Balance between benefit and cost

Cost is as pervasive constraint on the financial information needed. Financial

reporting imposes cost and mahalaga na ito ay justified ng benefit na derived from
the financial information.

The benefit derived from the information should exceed the cost incurred in
obtaining the information.

Comparison with full PFRS

Under ng Conceptual Framework for Financial Reporting ang fundamental
qualitative characteristics ng useful financial information ay:

a. Relevance- To be relevant, dapat ang financial information ay parehas may

predictive value and confirmatory value.
b. Faithful representation- To be a perfectly faithful representation, a depiction
should process the characteristics of completeness, neutrality, and free
from error.
Ang materiality ay isang subcharacteristic ng relevance.

Also, the Conceptual Framework mentions ang enhancing qualitative

characteristics na makakatulog para mag-increase ang usefulness ng information,
namely:

a. Understandability
b. Comparability
c. Verifiability
d. Timeliness

Elements of Financial Statements

Ang elements na directly related sa measurent ng financial position ay assets,

liabilities, and equity.

Ang elements na directly related sa measurent ng performance income and

expense.
Definitions
Asset

An asset is defined as a ‘resource controlled by the entity as a result of past event

and from which future economic benefits are expected to flow to the entity’.
In layman’s language and in short, assets are property owned.

Liability

Present obligation of a particular entity. Ang entity na liable must be identified.

Ang present obligation exists only kung saan ang entity ay walang alternative but
to make or to do something to settle the obligation.
Income

The conceptual framework defines income as “increase sa economic benefit

during the accounting period in the form of inflow or increase in asset or decrease
sa liability na nagre-result ng increase sa equity ng entity, bukod sa contribution
mula sa equity participants.

Sa madaling salita, ang income ay pagpapasok ng future economic benefit na

nakakadagdag sa equity bukod sa contribution mula sa owners.

Expense

Under ng conceptual framework, ang expense ay ‘kabawasan sa economic

benefit during the accounting period in the form of outflow or decrease sa net
asset at increase sa liability na nagreresulta sa pagliit ng equity, other than sa
distribution sa equity participants’. Simply stated, ang expense ay outflow ng
future economic benefit na nagpapaliit ng equity, other than distribution or
dividend na binabayad sa owners.

Recognition of elements

Recognition ay ang process ng incorporating sa statement of financial position

and statement of comprehensive income ng item na nameet ang definition ng
element at satisfies the following criteria:

a. Probable na magkaroon ng future economic benefit na associated doon sa

isang item na magfo-flow to and from the entity.
b. Ang item ay mayroong cost or value na mame-measure reliably.
Measurement of elements
Ang measurement ay ang process ng pag-determine ng monetary amounts kung
saan mine-measure ng entity ang kaniyang asset, liability, income, and expense
sa financial statements.
Under ng PFRS for SMEs, mayroong dalawang measurement bases:

1. Historical cost
2. Fair Value

Ang historical cost ay amount ng cash or cash equivalents na ibinayad or ang fair
value ng consideration na binigay para makabli ng asset at the time of acquisition.

Fair value ay ang price na mare-receive once na nagbenta ng asset or price na

ibabayad to transfer a liability in an orderly transaction between market
participants at the measurement date.

Comparison with full PFRS

Ang PFRS for SMEs and full PFRS ay nagse-share ay may parehas na provisions
sa definition, recognition, and measurement ng elements ng financial statemtents.
Ang significant difference lamang nila ay ang measurent ng elements ng financial
statements.
Ang PFRS for SMEs ay may dalawang measurement bases. ito ay ang historical
cost and fair value. However, under ng conceptual framework for financial
reporting ang measurement bases ay historical cost, current cost, realizable value,
and present value.

General features of financial statements (SMEs)

1. Fair presentation and compliance with PFRS forSMEs
2. Going concern
3. Accrual basis
4. Materiality and aggregation
5. Offsetting
6. Frequency of reporting
7. Comparative information
8. Consistency of presentation
Ang full PFRS at PFRS for SMEs ay may parehas na provisions sa general
features sa preparation ng financial statements.

Fair presentation

Dapat na mai-present fairly ang financial position, financial performance, and

cash flows ng isang entity.

Normally, maa-achieve ng isang SME ang fair presentation ng financial

statements kung ang financial statements nila ay in accordance sa PFRS for
SMEs.

Fair presentation ng financial statements ay ma-achieve a kung in- apply nito ang
PFRS with another disclosure when necessary because once na nag comply ang
entity with PFRS it can make a clear and not limited statement of such compliance
in the notes.

Compliance with PFRS for SMEs

Ang isang entity na nagco-comply sa PFRs for SMEs shall make explcit and
unreserved statement ng compliance sa notes.

Ang isang entity na may ‘public accountability’ ay prohibited for making this
statement ng compliance kahit pa na ito ay required by law to prepare financial
statements in accordance with the PFRS for SMEs.

Going concern

Goimg concern means that the accounting entity ay viewd as continuing sa

kanilang operation indefinitely in the absence to the contrary. Masasabing going
concern ang isang entity if the business can stay in operation for the foreseeable
future.

Going concern is particularly relevant when the management shall make an

estimate of the expected outcome ng future events such as recoverability ng
accounts receivables and estimations ng useful life ng isang asset.

Dapat na mag-prepare ang isang entity ng financial statements on a going

concern basis unless balak ng mag-liquidate ng management or cease trading or
walnang realistic option but to do so.
Accrual basis

Accrual basis of accounting ang dapat gamitin ng entity sa pagpe-prepare ng

financial statements except for cash flow information.

Accrual basis means that ang income ay ire-recognize when earned regardless
kung kelan sya nareceived and ang expense naman ay ire-recognize when
incurred regardless king kelan sya binayaran.

Ang essence ng accrual basis of accounting ay ang recognition ng accounts

receivable, accounts payable, prepaid expenses, accrued expense, deferred
income, and accrued income.

Materiality and aggregation

o Bawat material class of similar items ay pini-present ng magkahiwalay.

o Bawat items of dissimilar in nature or function ay pini-present ng
magkahiwalay maliban na lang kung ito ay immaterial.
o If a line item ay hindi individually material ay isinasama ito sa other items in
the statements or notes.

Offsetting

Ang asset and liabilities, and income and expenses ay di pwedeng i- offset
against each other unless it is required or permitted by another PFRS.
Frequency of Reporting
An entity shall present a complete set of financial statements at least annually.

Kapag ang isang entity ay magpapalit ng reporting period at magpresent ng

financial statements sa period na mas matagal or shorter than one year, ay
kailangan nyang i-disclose na:

o Anong period ang covered ng financial statements nila.

o Reason sa paggamit ng longer or shorter na period
o Ang amount na nakapresent sa financial statements are not entirely
comparable

Comparable Information
Maliban kung permitted or required ng PFRS for SMEs, ang entity ay
magdi-disclose ng comparative information sa previous period for all amounts na
reported sa current periodsnf financial statements.
Ang comparative information ay kasama sa narrative at descriptive information
kapag mahalaga sya sa understanding ng financial statement sa current period.

Magbe-benefit ang mga users mga uncertain information na nag-exist at the end
of the preceding reporting period at sa mga steps na ginawa during the current
period para maresolve ang uncertainty.

Consistency of Presentation

Implicit sa presentation ng comparable information ang principle ng consistency.

Nire-require sa principle ng consistency na dapat ang ‘accounting method and

practices ay ia-apply on a uniform basis from period to period’ meaning dapat
consistent. Example is when an entity used a FIFO method in one year, such
method is followed from year to year to meet the consistency of the presentation.
Hindi ibig sabihin na kapag consistency ay di na maaaring magpalit ng accounting
method. Kung ang pagpapalit ng accounting method and policies ay magre-result
ng faithfully representation and more relevant sa users ng financial statements
then that change should be made. Pero ang chages na mangyayari ay dapat na
ms-idisclose. Ang pagpapalit ng presentation at classification ng items sa financial
statements ay allowed:

o Kapag required sya ng other PFRS.

o Kapag ang significant change sa operations ng entity will give a more

appropriate revised presentation at classification sa financial statements.

Note*
It is inappropriate for an entity to leave accounting policies unchanged
when better and acceptable alternative exist.