2010 Accounting Alert - PFRS for SMEs

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Accounting AlertPhilippine Financial Reporting Standardfor Small and Medium-sized Entities

November 2010

Philippine Financial Reporting Standard

for Small and Medium-sized Entities

Accounting Alert

Copyright ' 2010 by Punongbayan & Araullo

All rights reserved.No part of this work covered by the copyright hereon may be reproduced and/or used in anyform or by any meansgraphic, electronic or mechanicalwithout the written permission of thepublisher.

ISBN 978-971-93586-4-0

Published by Punongbayan & Araullo20/F The Enterprise Center6766 Ayala Avenue1200 Makati City, Philippines

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Punongbayan & AraulloAccounting AlertPhilippine Financial Reporting Standard for Small and Medium-sized Entitiesby Punongbayan & AraulloFirst EditionMakati City

Copyright ' 2010 by Punongbayan & Araullo

ContentsContentsContentsContentsContents PPPPPagesagesagesagesages

A. Introduction 1

B. Who can use the PFRS for SMEs? 2

C. What are Small and Medium-sized Entities? 3

D. When does the PFRS for SMEs take effect? 5

E. What are the components of an SMEs financial statements? 5

F. What are the general recognition and measurementprinciples under PFRS for SMEs? 6

G. How does the PFRS for SMEs diverge from the full PFRS? 7Topics omittedDifferences in specific areas of recognition and

measurement guidanceSummary of main areas of differences in recognition

and measurement guidance

H. How does the PFRS for SMEs differ from PAS 101? 18

I. What specialized activities are covered in the PFRS for SMEs? 21

J. How will entities transition to the PFRS for SMEs? 21Areas where retrospective application is prohibitedOptional exemptionsDisclosure on first-time adoptionPhilippine SEC implementation guidelines

K. What other guidance is included in the PFRS for SMEs? 23

L. P&A concluding comment 25Potential benefitsChallenges of adopting the PFRS for SMEsPotential areas of impact

Assistance from P&A 28

Appendices 29

The new Philippine Financial Reporting Standard for Smalland Medium-sized Entities (PFRS for SMEs) becameeffective on January 1, 2010, with earlier applicationallowed. The standard was adopted by the FinancialReporting Standards Council (FRSC) from theinternational version issued by the InternationalAccounting Standards Board (IASB). The Securities andExchange Commission (SEC) has made the PFRS forSMEs a part of its rules and regulations, requiringcovered companies to implement the new standardstarting with 2010 financial statements to be filed withthe SEC.

The PFRS for SMEs could transform the way privatelyheld businesses in the Philippines prepare their financialstatements and accounts. We believe the new standardoffers a unique opportunity to create a standardizedaccounting framework for privately held businesses inthe country, and throughout the world as enterprisestransition to the International Financial ReportingStandards from which the PFRS for SMEs is adopted.

To our valued clients and friends

The PFRS for SMEs provides a substantially simplifiedset of internationally recognised accounting principlesfor privately held businesses. Based on the full PFRSs,which were developed primarily for listed companies,the PFRS for SMEs will particularly benefit businessesthat operate internationally.

Converting to new accounting principles alwaysinvolves some degree of financial and resource cost.Businesses and their advisers will have to learn newterminology and accounting techniques and makechanges to their accounting software. And there couldbe other implications. Despite these challenges,Punongbayan & Araullo (P&A) believes the short-term disruption will be outweighed by the longer termbenefits for many privately held businesses.

We have prepared this Accounting Alert to assist youin understanding and transitioning to the PFRS forSMEs. We at P&A will be glad to provide furtherassistance, if needed, in your implementation of thestandard in your respective organization.

November 2010

Introduction

The Philippine Financial Reporting Standard for Small andMedium-sized Entities (PFRS for SMEs) was approved bythe Financial Reporting Standards Council (FRSC) inOctober 2009 for implementation in the Philippines.The standard was adopted by the FRSC from theInternational Financial Reporting Standard for Small andMedium-sized Entities (IFRS for SMEs) published by theInternational Accounting Standards Board (IASB) inJuly 2009. The Preface to PFRS for SMEs issued by theFRSC adopting the standard in the Philippines ispresented in Appendix A.

The IASB issued the IFRS for SMEs to respond to ademand. The full IFRS were developed primarily forpublicly-traded entities. However, there are far moreprivately held companies than publicly-traded ones.Many private companies prepare financial statementsbut, in much of the world, these statements are basedon local requirements that differ from the full IFRS.

The IASBs full IFRS were designed to meet the needsof equity investors and other users of financialstatements in public capital markets and, therefore,cover a wide range of issues, as well as a sizeableamount of implementation guidance and disclosuresappropriate for public companies.

Users of the financial statements of SMEs do not havethe same needs, but are more focused on assessingshorter-term cash flows, liquidity and solvency. Inaddition, many SMEs have observed that full IFRSimpose a burden on them, and that this burden hasgrown as IFRS have become more detailed and morecountries have begun to use them. The IASB has,therefore, developed the IFRS for SMEs with the twingoals of meeting user needs while balancing costs andbenefits from a preparer perspective.

The Philippine scenario is not different from much ofthe world. In consideration of the needs of the usersof financial statements of privately held companies, aswell as the burden to preparers of those financialstatements, the then Accounting Standards Council(ASC, now the FRSC) provided temporary relief toprivate companies referred to as non-publiclyaccountable entities (or NPAEs) in October 2005by permitting entities that qualified as NPAEs not touse the full PFRS. The temporary relief was givenunder Philippine Accounting Standards (PAS) 101,Financial Reporting Standards for Non-publicly AccountableEntities. A copy of PAS 101 is presented inAppendix B.

PAS 101 previously permitted NPAEs to apply theapplicable financial reporting standards effective as ofDecember 31, 2004, i.e., NPAEs were given the optionto apply or not to apply any new FRSCpronouncements that became effective afterDecember 31, 2004.

Upon the adoption of the PFRS for SMEs, PAS 101was withdrawn; hence it is no longer applicable in thePhilippines.

This Accounting Alert aims to provide concernedentities with some guidance in using the PFRS forSMEs, mainly by providing discussions on thedifferences between the PFRS for SMEs and the fullPFRS on one hand, and between the PFRS for SMEsand PAS 101 on the other hand, as well as some issuesrelating to transitioning to the PFRS for SMEs.

A.

22222 Accounting AlerAccounting AlerAccounting AlerAccounting AlerAccounting Alert: PFRS for SMEst: PFRS for SMEst: PFRS for SMEst: PFRS for SMEst: PFRS for SMEs

B.

Who can use the PFRS for SMEs?

The PFRS for SMEs does not itselfdeal with this question. It providesinstead that the decision as to whichentities are required or permitted touse the PFRS for SMEs will restwith legislative and regulatoryauthorities and standard-setters inindividual jurisdictions.

However, it does contain a cleardefinition of the class of entity forwhich the standard is intended (seedefinition of the term small and medium-sized entities in Section C). Thisdefinition is essential so that (a) theIASB can decide on the accountingand disclosure requirements that areappropriate for that class of entity,and (b) the legislative and regulatoryauthorities, standard-setters,reporting entities and their auditorswill be informed of the intendedscope of applicability of thestandard.

The Philippine Securities andExchange Commission (SEC), in anotice to the public issued onDecember 11, 2009 (see AppendixC), announced that the CommissionEn Banc in its meeting onDecember 3, 2009 resolved toadopt the PFRS for SMEs as partof its rules and regulations. TheSEC Notice also included adefinition of small and medium-sized entities that includes sizecriteria (see Section C).

In the abovementioned notice ofDecember 11, 2009, the SECrequired entities that meet thedefinition of SMEs to apply thePFRS for SMEs as of the effectivedate (which was set for annualperiods beginning January 1, 2010 see Section D). This requirement hasbeen clarified by the SEC to meanthat entities qualifying as SMEsshall use the PFRS for SMEs; suchentities are not allowed to use otherfinancial reporting frameworks,such as the full PFRS, for theirgeneral purpose financialstatements. This requirement issomewhat restrictive, but for theSEC, this fulfills the goal to allowcomparability of financialstatements of SMEs.

The SEC, however, providedexemptions from the mandatoryadoption of PFRS for SMEs toSMEs that meet certain criteria. TheSEC notice to the publicissued on October 11, 2010 (seeAppendix F) provides a list of thoseSMEs that are exempted, whichinclude the following:

an SME is part of a group,either as a subsidiary, associateor jointly controlled entity,reporting under full PFRS;

an SME is a subsidiary orbranch office of a foreignsubsidiary that will be movingtowards IFRS pursuant to the

foreign countrys publishedconvergence plan;

an SMEs short-termprojections show that it willbreach the quantitativethresholds set in the criteriafor SME, and the breach isexpected to be significant andcontinuing due to its long-term effect on the entitystotal assets or liabilities;

an SME has concrete plans toconduct an initial publicoffering within the next twoyears;

an SME has a subsidiary thatis mandated to report underfull PFRS; and

an SME has been preparingfinancial statements using fullPFRS and has decided toliquidate its assets.

C.

What are Small and Medium-sized Entities?

SMEs as defined in PFRS forSMEs as defined in PFRS forSMEs as defined in PFRS forSMEs as defined in PFRS forSMEs as defined in PFRS forSMEsSMEsSMEsSMEsSMEsAs defined in the PFRS for SMEs,the term Small and Medium-sizedEntities (or SMEs) is not associatedwith any size criteria.

Small and medium-sized entities areinstead defined under the PFRS forSMEs as entities that:

a. do not have publicaccountability, and

b. publish general purposefinancial statements forexternal users.

An entity has public accountabilityif:

a. it files, or it is in the processof filing, its financialstatements with a securitiescommission or otherregulatory organization for thepurpose of issuing any classof instruments in a publicmarket; or

b. it holds assets in a fiduciarycapacity for a broad group ofoutsiders as one of its primarybusinesses. This is typically thecase for banks, credit unions,insurance companies,securities brokers/dealers,mutual funds and investmentbanks.

Entities holding assets in a fiduciarycapacity for reasons incidental to aprimary business are not, however,considered to be publiclyaccountable and, hence, can use thePFRS for SMEs. Examples ofwhere this may be the case aretravel or real estate agents, schools,charitable organizations,cooperative enterprises requiring anominal membership deposit andsellers that receive payment inadvance of delivery of goods andservices such as utility companies.

Accounting AlerAccounting AlerAccounting AlerAccounting AlerAccounting Alert: PFRS for SMEst: PFRS for SMEst: PFRS for SMEst: PFRS for SMEst: PFRS for SMEs 33333

SMEs as defined by theSMEs as defined by theSMEs as defined by theSMEs as defined by theSMEs as defined by thePhilippine SECPhilippine SECPhilippine SECPhilippine SECPhilippine SECAs mentioned earlier, the abovedefinition of SMEs under the PFRSfor SMEs does not include any sizecriteria. However, the PhilippineSEC, in its notice of December 11,2009 cited earlier, adopted thefollowing definition of small andmedium-sized entities that includessize criteria:

1. The entity has total assets ofbetween P3 million and P350million or total liabilities ofbetween P3 million and P250million;

2. It is not required to filefinancial statements underSRC Rule 68.1;

3. It is not in the process offiling its financial statementsfor the purpose of issuing anyclass of instruments in apublic market;

4. It is not a holder of asecondary license issued by aregulatory agency, such as abank (all types of banks), aninvestment house, a financecompany, an insurancecompany, a securities broker/dealer, a mutual fund and apre-need company; and

5. It is not a public utility.

The above SEC definition of SMEsis essentially the same as thedefinition of NPAEs adopted bythe then Accounting StandardsCouncil (now the FRSC) under PAS101, with the exception of theamounts set for the size criteria. Forthe definition of SMEs, the sizecriteria set by the SEC include af loor (P3 million for both totalassets and total liabilities) and aceiling (P350 million for total assetsand P250 million for totalliabilities). For the definition ofNPAEs, the size criteria werepegged at a single amount for totalassets (P250 million) and totalliabilities (P150 million); there wasno ceiling or floor similar to thatprovided for the definition ofSMEs.

This difference in size criteria hassome implications with regard tothe implementation in thePhilippines of the PFRS for SMEs,specifically on the matter relating totransition to the PFRS for SMEs (seerelevant discussion in Section J).


D.

When does the PFRS for SMEs take effect?

The SEC has set the effective dateof PFRS for SMEs for annualperiods beginning January 1, 2010.This effective date was later onrevised by the SEC to allow earlyapplication of the PFRS for SMEsin 2009 as long as the SMEs are


capable, in terms of systems andresources, to efficiently transition toPFRS for SMEs and provided theimpact of the early adoption isdisclosed in the financial statements(see related discussion under PhilippineSEC Implementation Guidelines inSection J).

The PFRS for SMEs defines whatstatements and disclosures shall bepresented as part of a complete setof financial statements, which arethe same components requiredunder the full PFRS. These includethe following:

a statement of financialposition as at the reportingdate;

either (i) a single statement ofcomprehensive income or (ii)a separate income statementand a separate statement ofcomprehensive income;

a statement of changes inequity for the reportingperiod;

a statement of cash flows forthe reporting period, with thecash flows from operating

activities presented usingeither the indirect method(i.e., profit or loss is adjustedfor the effects of non-cashtransactions, any deferrals oraccruals of past or futureoperating cash receipts orpayments, and items ofincome or expenses associatedwith investing or financingcash flows) or the directmethod (i.e., major classes ofgross cash receipts and grosscash payments are disclosed);and

notes, comprising a summaryof significant accountingpolicies and other explanatoryinformation.

In general, comparative informationis required in respect of theprevious comparable period for allamounts presented.

As a simplification in comparison tofull PFRS, where the only changesto equity during the periods forwhich financial statements arepresented arise from profit or loss,payment of dividends, correctionsof prior period errors, and changesin accounting policy, the entity maypresent a single statement ofincome and retained earnings inplace of a separate statement ofcomprehensive income and astatement of changes in equity.

E.

What are the components of an SMEsfinancial statements?

The PFRS for SMEs has beendesigned essentially to work as astand-alone document, with nomandatory cross references to fullPFRS. Where full PFRS permits anumber of possible accountingoptions for a particular transaction,the standard presents SMEs with asimplified version of the fullrequirements and reduces thenumber of options available tothem.

The requirements contained in thePFRS for SMEs for recognizing andmeasuring assets, liabilities, incomeand expenses are based onpervasive principles that are derivedfrom the FRSCs Framework for thePreparation and Presentation ofFinancial Statements and from the fullPFRS.

Where the PFRS for SMEs does notcontain a requirement that appliesspecifically to a transaction or otherevent or condition, the standardrequires that management appliesjudgment in developing anaccounting policy that results ininformation that is relevant andreliable.

In making such a judgment, ahierarchy is provided, withmanagement being advised to referto and consider the applicability ofthe following sources in descendingorder:

a. the requirements and guidancein the PFRS for SMEs dealingwith similar and related issues,and

b. the definitions, recognitioncriteria and measurementconcepts for assets, liabilities,income and expenses and thepervasive principles in thesection in the IFRS for SMEson Concepts and PervasivePrinciples.

In making the judgment,management may also consider therequirements and guidance in thefull PFRS dealing with similar andrelated issues, but this is notmandatory.

F.

What are the general recognition andmeasurement principles under PFRS forSMEs?


The table below provides a snapshot of how the PFRSfor SMEs compares with the full PFRS:

A snapshot of the PFRS for SMEs containing thesection no., title and description of the various sectionsof the standard is presented in Appendix D.

G.

How does the PFRS for SMEs divergefrom the full PFRS?


Compared to the full PFRS, the PFRS for SMEscontains a number of simplifications. Principal amongthese are using simplified drafting in writing thestandard, making the final document easier tounderstand and follow, and reducing the number ofdisclosures to be made when preparing the financialstatements.

The IASB has indicated that future revisions to theIFRS for SMEs (from which the PFRS for SMEs isadopted) will be made once every three years, providinga stable platform to both preparers and users offinancial statements prepared under the standard.

The IASB also indicated that it expects to undertake athorough review of the SMEs experience in applyingthe IFRS for SMEs when two years of financialstatements using the standard have been published by abroad range of entities. The IASB expects that it willthen propose amendments to address theimplementation issues identified in that review. It willalso address issues arising from new and amended IFRSthat are published in the intervening period.

Any such amendments made by the IASB are expectedto be adopted by the FRSC for implementation bySMEs in the Philippines.

FFFFFull PFRSull PFRSull PFRSull PFRSull PFRS PFRS for SMEsPFRS for SMEsPFRS for SMEsPFRS for SMEsPFRS for SMEs

Numbered by standard

Around 3,000 potentialdisclosures

Organized by topic(e.g., inventories)

Around 300 potentialdisclosures

Around 2,800 pages inlength

Less than 230 pages

Updated several timesa year

Anticipated to beupdated on a three-yearly basis


TTTTTopics omittedopics omittedopics omittedopics omittedopics omittedThe PFRS for SMEs also omits anumber of topics found in the fullPFRS that are not consideredrelevant to the needs of small andmedium-sized entities. Topicsomitted from the PFRS for SMEsare:

Segment reporting

Interim reporting

Earnings per share

Insurance

Assets held for sale

Differences in specific areas ofDifferences in specific areas ofDifferences in specific areas ofDifferences in specific areas ofDifferences in specific areas ofrecognition and measurementrecognition and measurementrecognition and measurementrecognition and measurementrecognition and measurementguidanceguidanceguidanceguidanceguidanceThe following paragraphs set outsome particular areas of interest,where the requirements in the PFRSfor SMEs diverge from those of thefull PFRS. The issues listed are byno means exhaustive, and referenceshould be made to the text of thestandard itself for a properunderstanding of all the potentialdifferences that may arise.

Financial instr uments(Sections 11 and 12)In seeking to meet user needs whilebalancing costs and benefits from apreparers perspective, the PFRS forSMEs divides its requirements onfinancial instruments into twosections one dealing with basicfinancial instruments and the otherwith more complex financialinstruments and transactions.

Examples of financial instrumentsthat are normally considered basicfinancial instruments (coveredunder Section 11 of the PFRS forSMEs) include:

cash

demand and fixed-termdeposits when the entity is thedepositor (e.g., banksaccounts)

commercial paper andcommercial bills held

accounts, notes and loansreceivable and payable(including loans to or fromsubsidiaries or associates thatare due on demand)

bonds and similar debtinstruments

investments in non-convertible preference sharesand non-puttable ordinary andpreference shares

commitments to receive a loanif the commitment cannot benet settled in cash

Examples of financial instrumentsthat will normally be consideredmore complex financial instrumentsand transactions (covered underSection 12) include:

asset-backed securities, such ascollateralized mortgageobligations, repurchaseagreements and securitizedpackages of receivables

options, rights, warrants,futures contracts, forwardcontracts and interest rateswaps that can be settled incash or by exchanging anotherfinancial instrument

financial instruments thatqualify and are designated ashedging instruments

commitments to make a loanto another entity

commitments to receive a loanif the commitment can be netsettled in cash


The PFRS for SMEs gives entities achoice to apply either:

a. the provisions of bothSections 11 and 12 of thePFRS for SMEs in full, or

b. the recognition andmeasurement provisions ofPAS 39, Financial Instruments:Recognition and Measurement.

Where an entity does choose toadopt the recognition andmeasurement provisions of PAS 39,however, it still makes thedisclosures for financial instrumentsthat are required by Sections 11 and12 of the PFRS for SMEs ratherthan those in PFRS 7, FinancialInstruments: Disclosures.

Basic financial instruments(Section 11)Under PFRS for SMEs, basicfinancial instruments arecategorized as either measured at:

a. amortized cost or cost lessimpairment; or

b. fair value with changes in fairvalue recognized in profit orloss (this will coverinvestments in non-convertible and non-puttablepreference shares and non-puttable ordinary shares thatare publicly traded or whosefair value can otherwise bemeasured reliably).

Under the full PFRS, there are fourcategories of financial instruments,for example:

a. a financial asset or financialliability at fair value throughprofit or loss

b. held-to-maturity investments(carried at amortized cost)

c. loans and receivables (carriedat amortized cost)

d. available-for-sale financialassets (carried at fair value)

(As additional information, theIASB has completed the initialphase of its project to replace IAS39 in its entirety. The initial phaseaddresses the classification andmeasurement of financial assets,reducing the complexity inaccounting for financial instrumentsby having fewer categories offinancial assets and a principle-based approach to theirclassification. Under this newrequirement, which will take effectwhen the other phases of theproject are completed and becomeeffective, entities are required toclassify a financial asset at eitheramortized cost or fair value on thebasis of the entitys business modelfor managing the financial asset,and the contractual cash flowcharacteristics of the financialasset.)

Other financial instrumentsissues (Section 12)In general, financial instrumentsthat do not meet the criteria set outin the PFRS for SMEs for treatmentas basic financial instruments aresubsequently measured at fair valueat the end of each reporting period,with changes in their fair valuebeing recognized in profit or loss.(The equivalents of PAS 39sclassifications on available-for-salefinancial assets and held-to-maturityinvestments are not included in thePFRS for SMEs.)

Section 12 of PFRS for SMEs alsosets out the conditions that must bemet for hedge accounting to beused and how it is to be applied.Compared with PAS 39, theguidance contained in PFRS forSMEs is a simplified version but ismore restrictive as it permits hedgeaccounting only for certainspecified risks and only if thehedging instrument complies withall the prescribed terms andconditions.

InInInInIn vvvvvestments in associaestments in associaestments in associaestments in associaestments in associa testestestestes(Section 14)The PFRS for SMEs contains anaccounting policy election in respectof investments in associates. Thisapplies to the accounting inconsolidated financial statementsand in the financial statements ofan investor that is not a parent buthas an investment in one or moreassociates.

Under the accounting policyelection for investments inassociates, an investor shall accountfor all such investments undereither:

the cost model (cost less anyaccumulated impairmentslosses);

the equity model (initialrecognition at the transactionprice, with subsequentadjustments to reflect theinvestors share of the profitor loss and othercomprehensive income of theassociate); or

the fair value model

The cost model should not beapplied to investments in associatesfor which there is a published pricequotation (the fair value modelmust be used where this is the case).

Under the full PFRS, there are nosimilar options provided in PAS 28,Investments in Associates. Instead,investments in associates arerequired to be accounted for usingthe equity method.

InInInInIn vvvvvestments in joint vestments in joint vestments in joint vestments in joint vestments in joint v enturenturenturenturentur eseseseses(Section 15)A similar accounting policy election(allowed for investments inassociates see above) applies toinvestments in jointly controlledentities (JCEs). The PFRS for SMEsdoes not permit the use ofproportionate consolidation.

Under the full PFRS, PAS 31,Interests in Joint Ventures, a venturershall recognize its interest in a JCEusing proportionate consolidationor, as an alternative, the equitymethod.

(As additional information, there isa proposed amendment to PAS 31to eliminate the proportionateconsolidation method as analternative for measurement ofinterests in joint ventures.)

InInInInIn vvvvvestment prestment prestment prestment prestment pr operoperoperoperoper tytytytyty(Section 16)Under the PFRS for SMEs,investment property with fair valuethat can be measured reliablywithout undue cost or effort on anongoing basis is accounted for atfair value, with changes in fair valuebeing accounted for through profitor loss. (It is not possible to elect touse the cost-depreciation-impairment model for suchproperty.)

All other investment properties areaccounted for as property, plant andequipment using the cost-depreciation-impairment model.

Under PAS 40, Investment Property,with certain exceptions, an entityshall measure its investmentproperty using either the fair valuemodel or the cost model. Theaccounting policy chosen shall beapplied to all of the investmentproperties.



PrPrPrPrPr operoperoperoperoper tytytytyty ,,,,, plant and equipment plant and equipment plant and equipment plant and equipment plant and equipment(Section 17)Items of property, plant andequipment are measured under thePFRS for SMEs using the cost-depreciation-impairment model.There is no option to use arevaluation model.

On the other hand, full PFRS underPAS 16, Property, Plant and Equipment,allows measurement of property,plant and equipment using eitherthe cost model or the revaluationmodel. The accounting policychosen shall be applied to an entireclass of property, plant andequipment.

Intangible assets other thanIntangible assets other thanIntangible assets other thanIntangible assets other thanIntangible assets other thanggggg oodoodoodoodood will will will will will (Section 18)

Initial measurementUnder full PFRS, PAS 38, IntangibleAssets, allows the recognition of anintangible asset from development(or from the development phase ofan internal project) when certainconditions are complied with.

The PFRS for SMEs, on the otherhand, requires an entity to recognizean expenditure incurred internallyon an intangible item, including allexpenditures for both research anddevelopment activities, as anexpense when it is incurred, unlessit forms part of the cost of anotherasset that meets the recognitioncriteria under the PFRS for SMEs.

The criteria for recognition as assetsare always considered satisfied forintangible assets that are separatelyacquired. Intangibles acquired in abusiness combination are normallyrecognized as assets on theassumption that their fair value canbe measured with sufficientreliability.

Measurement after recognitionFor those that meet the criteria forrecognition as assets, the PFRS forSMEs requires intangible assets tobe measured at cost lessaccumulated amortization andaccumulated impairment losses. Forthe purpose of the PFRS for SMEs,all intangible assets are consideredto have a finite useful life. Where anentity is unable to make a reliableestimate of the useful life of anintangible asset, the life is presumedto be ten years.

PAS 38, on the other hand, allowsan entity to choose either the costmodel or the revaluation model invaluing intangible assets. Intangibleassets with finite useful lives areamortized over their useful lives;those with infinite useful lives arenot amortized.

Business combinaBusiness combinaBusiness combinaBusiness combinaBusiness combina tions andtions andtions andtions andtions andggggg oodoodoodoodood will will will will will (Section 19)Under the PFRS for SMEs, theacquirer in a business combinationis required to allocate the cost of abusiness combination at theacquisition date, by recognizing theacquirees identifiable assets andliabilities and a provision for thosecontingent liabilities that satisfy therecognition criteria under the PFRSfor SMEs at their fair values at thatdate.

Any excess of the cost of thebusiness combination over theacquirers interest in the net fairvalue of the identifiable assets,liabilities and provisions forcontingent liabilities so recognizedshall be accounted for as goodwill(positive); any excess of theacquirers interest in the net fairvalue of the identifiable assets,liabilities and provisions forcontingent liabilities over cost shallbe accounted for as the so-callednegative goodwill.

Where a negative goodwill isidentified, the identification andmeasurement of the acquireesassets, liabilities and contingentliabilities and the measurement ofthe cost of the combination is firstof all reassessed. After thisreassessment, any remainingnegative goodwill is recognizedimmediately in profit or loss.


After initial recognition, theacquirer shall measure goodwillacquired in a business combinationat cost less accumulatedamortization and accumulatedimpairment losses. Where an entityis unable to make a reliable estimateof the useful life of goodwill, thelife is presumed to be ten years.

The process for the determinationof goodwill or negative goodwillunder the PFRS for SMEs isgenerally similar to that in the fullPFRS under PFRS 3, BusinessCombinations. However, under PAS38, Intangible Assets, intangible assetswith indefinite useful lives are notamortized; therefore, goodwill,being considered as havingindefinite useful life, is notamortized under the full PFRS.Additionally, PAS 36, Impairment ofAssets, requires annual testing ofgoodwill acquired in businesscombination for impairment,irrespective of whether there is anyindication of impairment.

The requirement under the PFRSfor SMEs to amortize goodwill is animportant simplification comparedto the requirements in full IFRS, asit eliminates the need for a detailedannual impairment test. Under thePFRS for SMEs, an impairment testis only needed for goodwill wherethere is an indicator of impairment.

Impairment of goodwill(Section 27)In testing for impairment ofgoodwill (in cases where there is anindicator of impairment), the PFRSfor SMEs requires that wheregoodwill cannot be allocated toindividual cash-generating units (orgroups of cash-generating units) ona non-arbitrary basis, then for thepurpose of testing goodwill, areporting entity tests impairment bydetermining the recoverable amountof either:

a. the acquired entity in itsentirety, if the goodwill relatesto an acquired entity that hasnot been integrated(integrated means the acquiredbusiness has been restructuredor dissolved into the reportingentity or other subsidiaries), or

b. the entire group of entities,excluding any entities thathave not been integrated, ifthe goodwill relates to anentity that has been integrated

This treatment allows goodwill tobe allocated and tested forimpairment at a higher level thanthat required by full PFRS underPAS 36 where goodwill is allocatedto the lowest level within the entityat which the goodwill is associatedand monitored for internalmanagement purposes.

BorBorBorBorBor rrrrr ooooowing costs wing costs wing costs wing costs wing costs (Section 25)The PFRS for SMEs requires anentity to recognize all borrowingcosts as an expense in profit or lossin the period in which they areincurred. Capitalization ofborrowing costs is not permitted.

The full PFRS, under PAS 23,Borrowing Costs, requires an entity tocapitalize borrowing costs that aredirectly attributable to theacquisition, construction orproduction of a qualifying asset aspart of the cost of that asset. Otherborrowing costs are recognized asexpense in the period whenincurred. A qualifying asset is anasset that necessarily takes asubstantial period of time to getready for its intended use or sale.

SharSharSharSharShar e-based pae-based pae-based pae-based pae-based pa ymentymentymentymentyment(Section 26)The requirements for therecognition and measurement ofshare-based payment under thePFRS for SMEs are based on thosecontained in the full PFRS, underPFRS 2, Share-based Payment.

The PFRS for SMEs does, however,provide simplified guidance onmeasuring the fair value of shareoptions and other forms of share-based payment with the followingthree-tier measurement hierarchy:

a. If an observable market priceis available for the equity


instruments granted, that priceshall be used.

b. If an observable market priceis not available, the fair valueof share options granted shallbe measured using entity-specific observable marketdata such as for a recenttransaction in the shareoptions.

c. If an observable market priceis not available and obtaining areliable measurement of fairvalue under (b) isimpracticable, an entity shallindirectly measure the fairvalue of share options usingan option pricing model. Theinputs for the model shoulduse market data to the greatestextent possible.

A similar hierarchy applies to themeasurement of shares and shareappreciation rights.

Emplo yee benef its (Section 28)

Determination of cost for theperiod for defined benefit plansUnder the PFRS for SMEs, fordefined benefit plans, thedetermination of the definedbenefit liability (or asset) and relatedcost of the defined benefit plan ismuch simpler than that in the fullPFRS under PAS 19, EmployeeBenefits. An SMEs cost of its

defined benefit plans for the periodis simply computed as the netchange in its defined benefit liabilityduring the period (the latter beingdetermined as the present value ofthe obligations minus the presentvalue of plan assets at the reportingdate).

Allocation of actuarial gains andlossesThe PFRS for SMEs gives entitiesan accounting policy election inrespect of the allocation of theiractuarial gains and losses. Underthis election, an entity shall either:

a. recognize all actuarial gainsand losses in profit or loss, or

b. recognize all actuarial gainsand losses in othercomprehensive income

In computing the defined benefitliability under PAS 19, a limit isapplied to the portion of actuarialgains and losses that can berecognized in profit or loss(referred to as the corridorapproach). Under the PFRS forSMEs, there is no ability to use suchcorridor approach.

(As additional information, there isa proposed amendment to PAS 19to remove the corridor approach.)

Actuarial valuation modelIf an entity is able, without unduecost or effort, to use the projectedunit credit method (which is themethod required by PAS 19) tomeasure its defined benefitobligation and the related expense,it shall do so.

However, where an entity is unableto do so without undue cost oreffort, it is permitted to make thefollowing simplifications inmeasuring its defined benefitobligation with respect to currentemployees. It may:

ignore estimated future salaryincreases;

ignore future service ofcurrent employees; and

ignore possible in-service-mortality of currentemployees between thereporting date and the dateemployees are expected tobegin receiving post-employment benefits.However, mortality afterservice (i.e., life expectancy)will still need to beconsidered.


The PFRS for SMEs does notrequire an independent actuary tobe engaged to perform the actuarialvaluation, nor does it require acomprehensive actuarial valuationto be performed annually. If theprincipal actuarial assumptions havenot changed significantly during theperiods between actuarialvaluations, the defined benefitobligation can be measured byadjusting the prior periodmeasurement for changes inemployee demographics such asnumber of employees and salarylevels.

Income tax Income tax Income tax Income tax Income tax (Section 29)The PFRS for SMEs requires SMEsto measure deferred tax assets andliabilities at an amount that includesthe effect of possible outcomes ofa review by the tax authorities sincethe uncertainty about whether thetax authorities will accept theamounts reported to them by theentity affects the amount of thecurrent tax and deferred tax. Theentity shall use the probability-weighted average amount of allpossible outcomes. The effect ondeferred tax expense arising from achange in the effect of the possibleoutcomes of a review by the taxauthorities shall be disclosed.

The full PFRS at present does notinclude the above-mentionedrequirements (sometimes referredto as uncertain tax positions).However, there is another standard(PAS 37, Provisions, ContingentLiabilities and Contingent Assets) thatapplies as well to income taxmatters that may result in therecognition or disclosure ofcontingencies relating to taxes.


SummarSummarSummarSummarSummary of main areas of differences in recognition and measurement guidancey of main areas of differences in recognition and measurement guidancey of main areas of differences in recognition and measurement guidancey of main areas of differences in recognition and measurement guidancey of main areas of differences in recognition and measurement guidanceThe following table summarizes some of the main simplifications made in the PFRS for SMEs, as well as someexamples of options available under full PFRS that are not included in the PFRS for SMEs:

SubjectSubjectSubjectSubjectSubject FFFFFull PFRSull PFRSull PFRSull PFRSull PFRS PFRS for SMEsPFRS for SMEsPFRS for SMEsPFRS for SMEsPFRS for SMEs

Basic financialinstruments

Other financialinstruments issues

There are four categories of financialinstruments.

Hedge accounting is only possiblewhere strict documentation andeffectiveness requirements are met.

There are two categories, i.e.,(a) amortized cost or cost lessimpairment, and (b) fair valuethrough profit or loss.

Rules on the use of hedgeaccounting are much simplified(although more restricted).

Allows option to use PAS 39 forrecognition and measurement (if thisoption is taken, SME still makesdisclosures required under PFRS forSMEs and not under PFRS 7).

Investments in associ-ates (in consolidated FSor in FS of investor thatis not a parent)

Requires use of equity method ofaccounting

Option to account for investmentsat: (a) cost; (b) under the equitymethod; or (c) at fair value throughprofit or loss (compulsory where aquoted price is available)

Investments in jointventures (in consolidatedFS or in FS of investorthat is not a parent)

Option to account for investments at:(a) proportionate consolidation; or(b) under the equity method

Option to account for investmentsat: (a) cost; (b) under the equitymethod; or (c) at fair value throughprofit or loss (compulsory where aquoted price is available)

No proportionate consolidationoption



Investment property Option to measure asset at: (a) cost-depreciation-impairment model; or(b) fair value model

Must be accounted for at fair value ifsuch a value is available withoutundue cost or effort. Cost modelshould be used only when fair valueis not available.

Measurement at cost or fair value isdriven by circumstances (i.e.,availability of fair value withoutundue cost or effort) rather than bychoice.

Property, plant andequipment

Option to measure asset at: (a) thecost model; or (b) revaluation model

Requires use of the cost-depreciation-impairment model

No revaluation option

Intangible assets otherthan goodwill

Development costs are capitalizedwhere the six specific criteria aremet.

Option to measure asset at: (a) thecost model; or (b) revaluation model

Intangible asset with infinite life isnot amortized but impairment testingis required annually, and wheneverindicator of impairment exists.

Expenditures incurred internally onintangible item, including allresearch and development costs,are expensed.

Requires subsequent measurementof capitalized intangible assets(such as those separately acquired)at cost less accumulatedamortization and impairment losses

No revaluation option for capitalizedintangible assets

All intangible assets are consideredto have a finite life, hence, areamortized. If there is no reliableestimate of useful life, presumed lifeis ten years.

Business combinationsand goodwill

Goodwill is not amortized.

Impairment testing is requiredannually, and whenever indicator ofimpairment exists.

Goodwill is allocated to and testedfor impairment at the lowest levelwithin the entity at which goodwill isassociated and monitored forinternal management purposes.

Goodwill is amortized (presumed lifeof ten years is used where reliableestimate of useful life cannot bemade).

Impairment testing is only neededwhen indicator of impairment exists.

Goodwill is allocated and tested forimpairment at a higher level.



Borrowing costs Borrowing costs directly attributableto acquisition, construction orproduction of a qualifying asset arecapitalized.

Other borrowing costs are expensedwhen incurred.

All borrowing costs are expensed.

Share-based payment In case market prices are notavailable, fair value of shares andshare options is estimated using avaluation technique thatincorporates all relevant factors andassumptions. Detailed guidance onmany valuation issues is provided.

A simplified guidance (i.e., a three-tier measurement hierarchy) formeasuring the fair value of shareoptions and other form of share-based payment is provided.

Post-employmentdefined benefit plans

Actuarial gains and losses are notrecognized as an income or expenseunless unrecognized gain or lossexceeds 10% of the greater of thedefined benefit obligation and fairvalue of plan assets. The amountexceeding this 10% corridor ischarged or credited to profit or lossover the employees expectedaverage remaining working lives, orthrough any systematic method thatresults in faster recognition ofactuarial gains or losses.

The corridor approach forrecognizing actuarial gains andlosses is not permitted. Any changein the defined benefit liability isrecognized as the cost of thedefined benefit plan for the period.

Income tax There is no specific provision onconsideration (and disclosure) of theeffect of uncertain tax positions (i.e.,possible outcomes of a review by taxauthorities) on deferred taxaccounts.

Requires measurement of deferredtax assets and liabilities at anamount that includes the possibleeffect of uncertain tax positions andrequires disclosure of relatedinformation in the financialstatements.

H.

How does the PFRS for SMEs differ fromPAS 101?

As mentioned in Section A earlier,PAS 101 previously permittedNPAEs to apply the applicablefinancial reporting standardseffective as of December 31, 2004,i.e., NPAEs were given the optionto apply or not to apply any newFRSC pronouncements that becameeffective after December 31, 2004.

Having been given such an option:

some NPAEs adopted thepronouncements effective asof December 31, 2004 but didnot adopt any newpronouncements madeeffective after December 31,2004;

other NPAEs adopted thepronouncements effective asof December 31, 2004 andapplied some new standardsmade effective afterDecember 31, 2004; while

some other NPAEs appliedthe full PFRS.

Those NPAEs that now qualify asSMEs under the PFRS for SMEsare required to apply the PFRS forSMEs, except for those entitiesexempted by the SEC from themandatory adoption of the PFRSfor SMEs (see discussion in Section Band Appendix F).

For the guidance of NPAEs thatpreviously used PAS 101, wepresent below some of the majordifferences between PAS 101 andthe PFRS for SMEs. (For NPAEsthat previously used the full PFRSand are now required to use thePFRS for SMEs, the discussions inSection G above will be relevant.)

The issues listed below are by nomeans exhaustive and, therefore,reference should be made to thetext of the relevant standards for aproper understanding of thoseissues.

Size criteria The sizecriteria for NPAEs (as theterm is used and definedunder PAS 101) were peggedat a single amount for totalassets (P250 million) and totalliabilities (P150 million); therewas no ceiling or floor similarto that provided for SMEs (asthe term is defined and usedunder the PFRS for SMEs).

The size criteria for SMEsinclude a floor (P3 million forboth total assets and totalliabilities) and a ceiling (P350million for total assets andP250 million for totalliabilities).



Option to choose financialreporting framework/standards NPAEs weregiven the option to applyaccounting standards effectiveas of December 31, 2004 andto apply or not to apply anynew FRSC pronouncementsthat became effective afterDecember 31, 2004, or toapply the full PFRS.

Qualifying SMEs, on the otherhand, are required to apply thePFRS for SMEs, save forthose entities that areexempted by the SEC fromthe mandatory adoption ofthe PFRS for SMEs (see SectionA and Appendix F).

Components of financialstatements NPAEsfinancial statements do notinclude a statement ofcomprehensive income.

SMEs financial statementsshall include either a singlestatement of comprehensiveincome or two statements, i.e.,a separate statement ofincome and a separatestatement of comprehensiveincome.

Valuation of inventories The last-in, first-out (LIFO)method was allowed as analternative valuation forinventories of NPAEs.

The PFRS for SMEs does notinclude the LIFO method asan alternative inventoryvaluation method.

Financial assets Theterminologies, recognition andmeasurement principles,presentation and disclosuresof financial assets allowed forNPAEs are very differentfrom those required under thePFRS for SMEs. Financialassets of NPAEs werecategorized as eithermarketable securities (current)that were measured at thelower of cost or market withthe unrealized lossesrecognized in profit or loss; ormarketable securities (non-current) that were measured atthe lower of cost or marketwith the unrealized lossestaken into the equity sectionof the balance sheet and otherlong-term investments thatwere accounted for under theequity method or the costmethod. Disclosures requiredwere minimum and notdetailed.

SMEs, on the other hand,have the option to followPAS 39, or the relevantprovisions under the PFRS forSMEs (which are also basedon PAS 39). Thoserequirements, while simplifiedfor SMEs, are definitely morecomplex and detailed thanthose allowed the NPAEsunder PAS 101.

Borrowing costs NPAEswere allowed to capitalizeborrowing costs attributableto qualifying assets.

Borrowing costs incurred bySMEs are required to becharged to expense whenincurred; capitalization ofborrowing costs is notallowed.

Income taxes There is norequirement for NPAEs toconsider (and disclose) theeffect of uncertain taxpositions (i.e., possibleoutcomes of a review by taxauthorities) on deferred taxaccounts.

The PFRS for SMEs requiresan SME to measure deferredtax assets and liabilities at anamount that includes thepossible effect of uncertaintax positions and to make therelated disclosures in thefinancial statements.


Plant, property andequipment NPAEs wereallowed to revalue plant,property and equipment (as analternative to using the costmethod). They were notrequired to de-componentizethe fixed assets whencomputing depreciation. (De-componentization refers tothe process wherein majorcomponents of a fixed assetare identified, cost is allocatedto such components, and thecomponents are depreciatedover their specific useful lives.)

The PFRS for SMEseliminates the revaluationmethod as an alternativemeasurement of property,plant and equipment ofSMEs. It requires de-componentization forpurposes of depreciationcomputation.

Goodwill and otherintangib le assets ForNPAEs, goodwill arising frombusiness combinations (as wellas other intangible assets) wasallowed to be amortized overa period of 20 years unless theuse of a useful life of morethan 20 years could bejustified.

For SMEs, goodwill and otherintangibles qualifying forrecognition are also allowed tobe amortized; amortizationperiod is over the estimateduseful life, or ten years ifuseful life cannot beestimated.

Consolidated financialstatements Minorityinterests were presented in theconsolidated financialstatements of an NPAEbetween the liability sectionand the equity section of thebalance sheet.

Under the PFRS for SMEs,non-controlling interests (thenew term for minorityinterests) are presented underthe equity section of thestatements of financialposition.

Investments in associates Investments in associates wererequired to be accounted forunder the equity method inconsolidated financialstatements of an NPAE.

Under the PFRS for SMEs,there are options in themeasurement of investmentsin associates in consolidatedfinancial statements: costmodel, equity model and thefair value model.

Interests in joint ventures NPAEs were allowed to carryinterests in joint venturesusing the proportionateconsolidation method or theequity method.

The PFRS for SMEs does notallow proportionateconsolidation in accountingfor interests in joint ventures.Options allowed are the sameas in accounting forinvestments in associates aspresented above.


I.

What specialized activities are covered inthe PFRS for SMEs?

Section 34 of the PFRS for SMEsdeals with the following specializedactivities:

a. agriculture

b. extractive activities

c. service concessionarrangements

In relation to agricultural activity,the PFRS for SMEs requires fairvalue to be used for biologicalassets where fair value is readilydeterminable without undue cost oreffort. All other biological assets areaccounted for at cost.

The pronouncements effective asof December 31, 2004 applied bymost NPAEs did not includestandards that deal with the abovespecialized activities.

J.

How will entities transition to the PFRSfor SMEs?

The default position under thePFRS for SMEs is that an entityshall, in its opening statement offinancial position as of its date oftransition (being the beginning ofthe earliest period for which theentity presents full comparativeinformation):

a. recognize all assets andliabilities whose recognition isrequired by the PFRS forSMEs;

b. not recognize items as assetsor liabilities if the PFRS forSMEs does not permit suchrecognition;

c. reclassify items that itrecognized under its previousfinancial reporting framework

as one type of asset, liabilityor component of equity, butare now a different type ofasset, liability or componentof equity under the PFRS forSMEs; and

d. apply the PFRS for SMEs inmeasuring all recognizedassets and liabilities.

The accounting policies that anentity uses in its opening statementof financial position prepared inaccordance with the PFRS forSMEs may differ from those that itused for the same date using itsprevious financial reportingframework. The transition to thePFRS for SMEs, therefore, willresult in adjustments that arise from

transactions, other events orconditions that occurred before thedate of transition to the PFRS forSMEs; such adjustments arerecognized directly in retainedearnings (or, if appropriate, anothercategory of equity) at the date oftransition to the PFRS for SMEs.

The PFRS for SMEs does, however,contain certain exemptions andsimplifications that apply only to afirst-time adopter of the PFRS forSMEs. (An entity is a first-timeadopter where it prepares its annualfinancial statements in accordancewith the PFRS for SMEs for thefirst time, regardless of whether itsprevious accounting framework wasfull PFRSs or another set ofaccounting framework.)

Areas where retrospectiveAreas where retrospectiveAreas where retrospectiveAreas where retrospectiveAreas where retrospectiveapplication is prohibitedapplication is prohibitedapplication is prohibitedapplication is prohibitedapplication is prohibitedOn first-time adoption of the PFRSfor SMEs, an entity shall notretrospectively change theaccounting that it followed under itsprevious financial reportingframework for any of the followingtransactions:

derecognition of financialassets and financial liabilities

hedge accounting

accounting estimates

discontinued operations

measuring non-controllinginterests

Optional exemptionsOptional exemptionsOptional exemptionsOptional exemptionsOptional exemptionsAn entity may use one or more of anumber of exemptions in preparingits first financial statements thatconform to the PFRS for SMEs.These exemptions are similar tothose contained in PFRS 1, First-time Adoption of Philippine FinancialReporting Standards.

Disclosure on first-timeDisclosure on first-timeDisclosure on first-timeDisclosure on first-timeDisclosure on first-timeadoptionadoptionadoptionadoptionadoptionIn order to explain the process oftransition, the PFRS for SMEscontains requirements for a first-time adopter to disclose a numberof reconciliations to its most recentfinancial statements prepared underits previous financial reportingframework.

If it is impracticable for an entity torestate the opening statement offinancial position at the date oftransition in accordance with therequirements of the PFRS forSMEs, the entity shall apply theprocedures for preparing financialstatements at the date of transitionin the earliest period for which it ispracticable to do so, and shallidentify the data presented for priorperiods that are not comparablewith the data that conforms to thePFRS for SMEs.

Philippine SEC implementationPhilippine SEC implementationPhilippine SEC implementationPhilippine SEC implementationPhilippine SEC implementationguidelinesguidelinesguidelinesguidelinesguidelinesA number of issues have emergedregarding transitioning of entities tothe PFRS for SMEs. Entities thatneed to transition to the PFRS forSMEs generally will fall under oneof the following categories:

Entities that previouslyqualified as NPAEs and usedPAS 101 now qualify as SMEs;these entities will transitionfrom PAS 101 to the PFRS forSMEs.

Entities that previouslyqualified as NPAEs and usedPAS 101 now do not qualify asSMEs because they crossedthe ceiling for the size criteriafor SMEs; these entities willtransition from PAS 101 tothe full PFRS.


Entities that previouslyqualified as NPAEs but optedto use full PFRS now qualifyas SMEs; these entities (withthe exception of entities thatare exempted by the SECfrom the mandatory adoptionof the PFRS for SMEs) willtransition from the full PFRSto the PFRS for SMEs.

Entities that did notpreviously qualify as NPAEsbecause they exceeded the sizecriteria and, hence, used thefull PFRS, now qualify asSMEs because of the higherceiling for the size criteria forSMEs; these entities willtransition from the full PFRSto the PFRS for SMEs.

Entities that did not qualify asNPAEs and used other non-PFRS-based financialreporting frameworks (such ascash or modified cash basisand tax basis) now qualify asSMEs; these entities shalltransition from their previousnon-PFRS-based financialreporting frameworks to thePFRS for SMEs.

To address the more importantemerging issues on the adoption ofthe PFRS for SMEs, especially onthe transition to the PFRS forSMEs, the SEC, in a CommissionEn Banc meeting on February 4,2010, adopted someimplementation guidelines.Presented in Appendix E is a copyof the full SEC ImplementationGuidelines.

K.

What other guidance is included in thePFRS for SMEs?


The PFRS for SMEs includes someother sections:

a. Glossary of Terms provides the definition ofcertain terms used in thePFRS for SMEs

b. Derivation Table identifiesthe primary sources in fullPFRS from which theprinciples in each section ofthe PFRS for SMEs werederived

c. Basis for Conclusion provides the discussions andvarious considerations madein coming out with theconclusions adopted in thePFRS for SMEs

d. Illustr ative FinancialStatements includes acomplete set of illustrativefinancial statements preparedin accordance with the PFRSfor SMEs to illustrate majoraspects of the standard

e. Presentation andDisclosure Checklist summarizes the presentationand disclosure requirementsthroughout the PFRS forSMEs

Views from the experts


L.

P&A concluding comment

P&A welcomes the publication ofthe PFRS for SMEs. We believethere is a strong demand from thissector for an international approachto reporting that is less onerousthan full PFRS. We also believe thatusers of financial information in thenon-publicly accountable sector donot have the same requirements asusers of listed company financialstatements.

The introduction of aninternational approach to theaccounting for entities in this sectorshould bring credibility to theirfinancial statements as banks andother financial institutions takecomfort in the fact that aninternationally recognized set ofstandards is being applied by thesesmaller entities.

While the cost of preparing generalpurpose financial statements usingthe PFRS for SMEs means that itmay not be suitable for very smallentities, we expect the standard tobe beneficial for many othercompanies in the non-publiclyaccountable sector.

As mentioned earlier, the SECrequires mandatory application ofthe PFRS for SMEs by entitiesqualifying as SMEs save for thoseSMEs that were given exemption bythe SEC (see Section A andAppendix F). Hence, SMEs thatpresently use the full PFRS willhave to transition to the PFRS forSMEs to comply with such SECrequirement.

We have indicated that suchmandatory requirement issomewhat restrictive and we believegiving the SMEs the option toadopt the full PFRS is a moreappropriate approach toimplementing the new standard.The SECs move to allow moreexemptions from the mandatoryadoption of the PFRS for SMEs isa welcome development. However,unless the concerned SMEs fallclearly under those exemptsituations, we advise them to applythe PFRS for SMEs to avoid anypossible sanctions fornoncompliance.

Potential benefit sPotential benefits of adopting thePFRS for SMEs are many, amongothers:

improved access to capital

improved quality andcomparability of reporting

facilitates cross-bordertrading

focused on the needs ofusers of SME financialstatements

audit efficiencies

stability initial two-yearcomprehensive reviewfollowed by three-yearlyomnibus update

eases burden where the fullPFRS was previouslyrequired

stepping stone to full PFRSfor private entities aiming foran Initial Public Offering


Challenges of adopting PFRS forChallenges of adopting PFRS forChallenges of adopting PFRS forChallenges of adopting PFRS forChallenges of adopting PFRS forSMEsSMEsSMEsSMEsSMEsOn the other hand, there arechallenges that come with adoptingthe PFRS for SMEs.

As noted above, the IASB took acost-benefit approach in developingthe standard. Nevertheless,converting to new accountingprinciples always involves somedegree of financial and resourcecost, which can sometimes beharder for smaller companies tohandle.

These costs need to be carefullyconsidered by companies that areadopting the PFRS for SMEs.Challenges that private businessesmay face include:

Lear ning ne w ter minolo gy andaccounting tec hniques

Businesses and their adviserswill have to learn newterminology and accountingtechniques and make changesto their information systemsand accounting software.

Management reportingprocesses may need to bereviewed.

Businesses may need to collectadditional data about some oftheir transactions.

New concepts

For companies that have useda financial reportingframework that is not basedon PFRS, some of theterminology and concepts inthe PFRS for SMEs may beunfamiliar: for example, theneed to apply fair valueaccounting for sometransactions, to prepare astatement of cash flows or toconsolidate subsidiaries.

Valua tion issue

While the PFRS for SMEs hasattempted to limit the use offair value to situations wherethe benefits from its useoutweigh the costs, the use offair values under the PFRS forSMEs may still be morewidespread than under afinancial reporting frameworkthat is not based on PFRS.

For example, the requirementto recognize an expense forshare-based payments basedon the fair value of theinstruments provided will be anew concept to smallerentities. The use of a valuationexpert may be necessary insome situations in order toarrive at the fair value.


PPPPPotential areas of impactotential areas of impactotential areas of impactotential areas of impactotential areas of impactChanging to the PFRS for SMEsmay have an effect on the actualoperations of the company.Potential areas of impact include:

Distrib uta b le pr of its

As the profits available fordistribution are not the sameas the accounting profits,consideration will need to begiven to the impact of anychanges resulting fromadopting the PFRS for SMEs.

For example, the effect ofitems that are accounted for atfair value through profit orloss is considered areconciling item indetermining the amount ofretained earnings available fordistribution under an SECrule.

Tax

For a number of SMEs usinganother basis for reportingtaxable income (such as cashbasis or tax basis), a moveaway from such basis will havetax implications. Where this isthe case, in decision making,consideration will need to begiven to the effect on cashpayments and future taxplanning.

Impact on loan co venants

In decision making,consideration will need to begiven to the effect of adoptingthe PFRS for SMEs (changesin gearing, etc.) on loancovenants and otheragreements with borrowers.

Where the PFRS for SMEs is to beadopted, more detailed study,planning and analysis will need tobe made relating to the transition tothe new standard. For example,advance planning may be requiredto gather the information neededfor prior years that will be presentedas comparatives in the financialstatements and the opening balancesheet at the start of the earliestcomparative period presented.

Assistance from P&A

Should you have any questions or should you needassistance on matters covered in this Accounting Alert,please contact the P&A engagement partner assigned toyour company, or send an e-mail to any of thefollowing partners of the Firm:

Marivic Espao, Managing Partner & [email protected]

Jun Cuaresma, Head - Audit & Assurance [email protected]

Dally Duque, Head - Audit Technical [email protected]

Mabel Comedia, Partner - Audit Technical [email protected]

Copies of the PFRS for SMEs can be downloadedfrom the IASB website at www.iasb.org.

Copies of this Accounting Alert can be downloadedfrom the P&A website at www.punongbayan-araullo.com. Hardcopies can be obtained from P&A atthe 20th Floor, Tower 1, The Enterprise Center, 6766Ayala Avenue, Makati City.


AppendicesAppendicesAppendicesAppendicesAppendices PPPPPagesagesagesagesages

Appendix A: Preface to PFRS for SMEs issued by the FRSC 30

Appendix B: Philippine Accounting Standard 101 32

Appendix C: SEC Notice dated December 11, 2009 on theadoption of PFRS for SMEs as part of theSEC rules and regulations 38

Appendix D: Snapshot of the PFRS for SMEs 40

Appendix E: SEC Notice dated February 9, 2010 providingthe Implementation Guidelines to addresscertain issues on the adoption of the PFRS forSMEs 44

Appendix F SEC Notice dated October 11, 2010providing exemption from mandatory adoptionof PFRS for SMEs 48

Preface to Philippine Financial Reporting Standardfor Small and Medium-sized Entities (PFRS for SMEs)

Appendix A

1. The Financial Reporting Standards Council (FRSC)approved on 13 October 2009, the adoption ofInternational Financial Reporting Standard for Smalland Medium-sized Entities (IFRS for SMEs) issuedby the International Accounting Standards Board(IASB), as Philippine Financial Reporting Standardfor Small and Medium-sized Entities (PFRS forSMEs).

Scope of PFRS for SMEsScope of PFRS for SMEsScope of PFRS for SMEsScope of PFRS for SMEsScope of PFRS for SMEs2. The IASB describes SMEs as entities that (a) do not

have public accountability, and (b) do not publishgeneral purpose financial statements for externalusers. (See Section 1 of the PFRS for SMEs.) Anentity has public accountability if:

a. its debt or equity instruments are traded in apublic market or it is in the process of issuingsuch instruments for trading in a public market(a domestic or foreign stock exchange or anover-the-counter market, including local andregional markets),

b. it holds assets in a fiduciary capacity for a broadgroup of outsiders as one of its primarybusinesses. This is typically the case for banks,credit unions, insurance companies, securitiesbrokers/dealers, mutual funds and investmentbanks.

3. The IASB, however, recognizes that manyjurisdictions around the world have developed theirown definitions of SMEs for a broad range ofpurposes including prescribing financial reportingobligations. Often those national or regionaldefinitions include quantified criteria based onrevenue, assets, employees or other factors.

4. In the Philippines, the PFRS for SMEs shall be usedby entities that meet the definition of an SME as setforth in the Securities and Exchange Commission(SEC) En Banc Resolution dated 13 August 2009.The SEC defines an SME for financial reportingonly as an entity:

a. With total assets between P3 Million and P350Million or total liabilities of between P3 Millionand P250 Million;

b. That is not required to file financial statementsunder SRC Rule 68.1;

c. That is not in the process of filing its financialstatements for the purpose of issuing any classof instruments in a public market;

d. That is not a holder of a secondary licenseissued by a regulatory agency, such as a bank (alltypes of banks), an investment house, a financecompany, an insurance company, a securitiesbroker/dealer, a mutual fund and a pre-needcompany; and

e. That is not a public utility.



Effective Date and TEffective Date and TEffective Date and TEffective Date and TEffective Date and Transitionransitionransitionransitionransition5. An entity that meets the definition of an SME in

paragraph 4 above shall apply the PFRS for SMEsfor annual periods beginning on or before 1 January2010.* However, the guidance for applying therequirements of Section 23, Revenue, in recognizingrevenue from agreements for the construction ofreal estate set forth in paragraph 23A.14 and 23A.15shall apply for annual periods beginning on or after1 January 2012.

6. The amount of total assets and total liabilities statedin paragraph 4(a) above shall be based on theaudited financial statements as of 31 December2009.

7. An entity that applies the PFRS for SMEs for thefirst time (i.e., a first-time adopter of the PFRS forSMEs) shall apply the transition provisions inSection 35 of the PFRS for SMEs. A first-timeadopter of the PFRS for SMEs is an entity thatpresents its first annual financial statements thatconform to the PFRS for SMEs, regardless ofwhether its previous accounting framework was fullPFRS or another set of accounting standards (e.g.,the standards set forth in PAS 101, Financial ReportingStandards for Non-Publicly Accountable Entities).

WWWWWithdrawal of Pithdrawal of Pithdrawal of Pithdrawal of Pithdrawal of PAS 101AS 101AS 101AS 101AS 1018. PAS 101 is hereby withdrawn.

* The Preface to PRFS for SMEs was subsequently amended to allow the early adoption of the PFRS for SMEs by SMEs that are capable, interms of systems and resources, to eff iciently transition to the new standard for their financial statements as of that earlier date.

FRSC MembersFRSC MembersFRSC MembersFRSC MembersFRSC Members

Carlos R. Alindada, Chairman

Maximo C. Roque Jr.

Thaddeus E. Venturanza/Ma. Gracia Casals-Diaz

Ma. Violeta V. Vicente

Ma. Dolores B. Yuvienco

Romeo C. Alba

Eugene Mateo/Ma. Elenita B. Cabrera

Ester F. Ledesma

Alfredo B. Parungao

Philippine Accounting Standard (PAS) 101(Withdrawn in October 2009 when FRSC approved the adoption of

the PFRS for SMES -- see Appendix A)

Appendix B

FFFFFinancial Rinancial Rinancial Rinancial Rinancial Reporeporeporeporeporting Standards for Non-publicly Accountable Entitiesting Standards for Non-publicly Accountable Entitiesting Standards for Non-publicly Accountable Entitiesting Standards for Non-publicly Accountable Entitiesting Standards for Non-publicly Accountable Entities

ContentsContentsContentsContentsContents PPPPParagraphsaragraphsaragraphsaragraphsaragraphs

Introduction 1-5

Objective 6

Qualifying entities 7-10

Option available to qualifying entities 11-13

Financial Reporting Standards applicable to qualifying entities 14

Disclosure 15

Effective date 16

AppendixFinancial reporting standards effective as of December 2004applicable to qualifying entities

Approval of PAS 101 by the ASC



IntroductionIntroductionIntroductionIntroductionIntroduction1. The Accounting Standard Council (ASC), in line with

the accounting professions objective to convergePhilippine accounting standards with internationalaccounting standards, issued a number of newaccounting standards, referred to as PhilippineFinancial Reporting Standards (PFRSs) that becameeffective in 2005. The adoption of the new accountingstandards was approved by the Securities and ExchangeCommission (SEC), the Board of Accountancy (BOA)and Professional Regulation Commission (PRC); andthe Bangko Sentral ng Pilipinas (BSP). The PFRSswere intended at that time to be applicable to allreporting entities that prepared financial statementsin conformity with generally accepted accountingprinciples in the Philippines.

2. Considering the significant number of small andmedium-sized entities (SMEs) in the Philippines, theASC has considered providing a temporary relief toSMEs in the application of the new standards.

3. The ASC plan was given impetus by the decision ofthe International Accounting Standards Board (IASB)in 2005 to undertake a project to develop accountingstandards suitable for entities that (1) do not havepublic accountability and (2) publish general purposefinancial statements for external users (e.g., owners whoare not involved in managing the business, existing andpotential creditors, and credit rating agencies). TheIASB refers to this group of entities as Non-PubliclyAccountable Entities, or NPAEs. The IASB hasdecided to use the term non-publicly accountableentities, rather than small and medium-sized entitiesbecause the latter term has different meanings aroundthe world.

4. Under the IASB project, an entity has publicaccountability if:

it has filed, or it is in the process of filing, itsfinancial statements with a securities commissionor other regulatory organization for the purposeof issuing any class of instruments in a publicmarket;

it holds assets in a fiduciary capacity for a broadgroup of outsiders, such as a bank, insurancecompany, securities broker/dealer, pension fund,mutual fund or investment banking entity;

it is a public utility or similar entity that providesan essential public service; or

it is economically significant in its home countryon the basis of criteria such as total assets, totalincome, number of employees, degree of marketdominance, and nature and extent of externalborrowings.

5. The IASB expects to issue an exposure draft onaccounting by NPAEs in March 2006 and the finalstandard in 2007.

Philippine Accounting Standard 101Financial Reporting Standards for Non-publicly Accountable Entities


3. an issuer with assets of atleast P50 million andhaving 200 or moreholders each holding atleast 100 shares of a classof its equity securities asof the first day of theissuers fiscal year;

b. if it is in the process of filingits financial statements for thepurpose of issuing any class ofinstruments in a public market;

c. if it holds assets in a fiduciarycapacity for a broad group ofoutsiders, such as a bank (alltypes of banks), an investmenthouse, a finance company, aninsurance company, asecurities broker/dealer, amutual fund and a pre-needcompany;

d. if it is a public utility or similarentity that provides anessential public service;

e. if it is economically significant,as described in paragraph 8; or

f. if it is considered by itsprimary regulator to havepublic accountability.

8. For purposes of paragraph 7(e),an entity is consideredeconomically significant if itexceeds either of the following:total assets of P250 million ortotal liabilities of P150 million.The total assets and total liabilitiesare based on the entitys annualfinancial statements and onconsolidated totals, if the entitypresents consolidated financialstatements.

9. The criteria for an economicallysignificant entity are arbitrary andwill be reviewed when the IASBhas issued its final standard onNPAEs or earlier if necessary.

10.For purposes of this Standard, anentity that is a subsidiary of aparent that is considered to havepublic accountability underparagraph 7 is similarly consideredto have public accountability.

ObjectiveObjectiveObjectiveObjectiveObjective6. The objective of this Standard is

to provide temporary relief in theapplication of the new PFRSs thatbecame effective in 2005 toentities that are covered by thisStandard. The Standard identifieswhich entities are covered,provides an option to theseentities in the application of thenew PFRSs, and specifies thef inancial reporting standardsapplicable to these entities.

7. This Standard shall be applied inthe general purpose financialstatements prepared andpresented by an entity with nopublic accountability. An entityhas public accountability:

a. if it is required to file financialstatements under SEC Rule68.1, Special Rule on FinancialStatements of Reporting Companiesunder Section 17.2 of the SecuritiesRegulation Code. Under the SECrules, these would include:

1. an issuer which has sold aclass of their securitiespursuant to a registrationunder Section 12 of theCode;

2. an issuer with a class ofsecurities listed for tradingon an Exchange; and


Option AOption AOption AOption AOption Available to Qualifvailable to Qualifvailable to Qualifvailable to Qualifvailable to QualifyingyingyingyingyingEntitiesEntitiesEntitiesEntitiesEntities11.A qualifying entity under this

Standard is allowed not to applyin its general purpose financialstatements the new PFRSs thatbecame effective in 2005.

12.A qualifying entity, however, maystill choose to apply any or all ofthe new PFRSs.

13.An entity that has publicaccountability, as provided inparagraphs 7 and 10, is requiredto apply the new PFRSs in itsfinancial statements for 2005,unless its primary regulator issuesa pronouncement exempting theentity from applying a newstandard or certain provisions ofa new standard.

FFFFFinancial Rinancial Rinancial Rinancial Rinancial Reporeporeporeporeporting Standardsting Standardsting Standardsting Standardsting StandardsApplicable to QualifApplicable to QualifApplicable to QualifApplicable to QualifApplicable to Qualifying Entitiesying Entitiesying Entitiesying Entitiesying Entities14.A qualifying entity under this

Standard that chooses to avail ofthe option not to apply the newPFRSs shall apply the applicablef inancial reporting standardseffective as of December 2004 inpreparing its general purposef inancial statements. TheAppendix lists these standards.

DisclosureDisclosureDisclosureDisclosureDisclosure15.A qualifying entity shall disclose

the basis of preparation of itsfinancial statements and thespecific accounting policies used.

* The effectivity of PAS 101 was extended from 2007; it was withdrawn only in October 2009 when the PFRS for SMEs was adopted by theFRSC.

Effective DateEffective DateEffective DateEffective DateEffective Date16.A qualifying entity shall apply this

Standard for annual periodsbeginning on or after January 1,2005. The Standard shall beeffective for 2005 to 2007, unlessrevoked earlier.*

AppendixAppendixAppendixAppendixAppendix

Financial Reporting StandardsEffective as of December 2004Applicable to Qualifying NPAEs under PAS 101


FFFFFramework for the Pramework for the Pramework for the Pramework for the Pramework for the Preparation and Preparation and Preparation and Preparation and Preparation and Presentation of Fresentation of Fresentation of Fresentation of Fresentation of Financial Statementsinancial Statementsinancial Statementsinancial Statementsinancial Statements

SFAS 1 (rev) Presentation of Financial Statements

SFAS 4 (rev) Inventories

SFAS 8 Accounting for the Effects of Changes in Foreign Exchange Rates

SFAS 8A Deferral of Foreign Exchange Differences (an amendment of SFAS 8)

SFAS 10 Summary of Generally Accepted Accounting Principles on Investments

SFAS 13 (rev) Net Profit or Loss for the Period, Fundamental Errors and Changes in AccountingPolicies

SFAS 18 Summary of Generally Accepted Accounting Principles on Stockholders Equity

SFAS 22 (rev) Cash Flow Statements

SFAS 24 Retirement Benefit Costs

SFAS 25 Borrowing Costs

SFAS 26 Construction Contracts

SFAS 28 Revenue

SFAS 10/IAS 10 Events After the Balance Sheet Date

SFAS 12/IAS 12 Income Taxes

SFAS 16/IAS 16 Property, Plant and Equipment

SFAS 17/IAS 17 Leases

SFAS 20/IAS 20 Accounting for Government Grants and Disclosure of Government Assistance

SFAS 22/IAS 22 Business Combinations

SFAS 24/IAS 24 Related Party Disclosures

SFAS 26/IAS 26 Accounting and Reporting by Retirement Benefit Plans

SFAS 27/IAS 27 Consolidated Financial Statements and Accounting for Investments in Subsidiaries

SFAS 28/IAS 28 Accounting for Investments in Associates

SFAS 31/IAS 31 Financial Reporting of Interests in Joint Ventures

SFAS 35/IAS 35 Discontinuing Operations

SFAS 36/IAS 36 Impairment of Assets

SFAS 37/IAS 37 Provisions, Contingent Liabilities and Contingent Assets

SFAS 38/IAS 38 Intangible Assets


Approval of PApproval of PApproval of PApproval of PApproval of PAS 101 by the ASCAS 101 by the ASCAS 101 by the ASCAS 101 by the ASCAS 101 by the ASC

The Accounting Standards Council (ASC) has approvedin October 2005 the issuance of Philippine AccountingStandard (PAS) 101, Financial Reporting Standards for Non-publicly Accountable Entities.

ASC MembersASC MembersASC MembersASC MembersASC Members

Carlos R. Alindada, ChairmanRomeo C. AlbaNestor A. Espenilla Jr./ Ma. Dolores B. YuviencoRoberto G. ManabatEugene T. MateoAlfredo ParungaoMaximo C. RoqueVioleta V. Vicente

REPUBLIC OF THE PHILIPPINESDepartment of Trade and Industry

SECURITIES AND EXCHANGE COMMISSIONSECURITIES AND EXCHANGE COMMISSIONSECURITIES AND EXCHANGE COMMISSIONSECURITIES AND EXCHANGE COMMISSIONSECURITIES AND EXCHANGE COMMISSIONSEC Building, EDSA, Greenhills, Mandaluyong City

Appendix C

NOTICE

Notice is hereby given that the Commission En Banc in its meeting of 03 December 2009 resolved to adopt thePhilippine Financial Reporting Standards for Small and Medium Entities (PFRS for SMEs) as part of its rules andregulations. The PFRS for SMEs were adopted on 13 October 2009 by the Philippine Financial Reporting StandardsCouncil form the International Financial Reporting Standards (IFRS) for Small and Medium Entities by the InternationalAccounting Standards Board.

In this PFRS for SMEs, many of the principles in full Philippine Financial Reporting Standards (PFRS) forrecognizing and measuring assets, liabilities, income and expenses have been simpli

Documents

2010 Accounting Alert - PFRS for SMEs