PFRS for Small
Entities
Topics
þ Scope of PFRS for
Small Entities (“the
Framework”)
þ Key Differences with
PFRS for SME and
Full PFRS
þ Transitional
Provisions
Scope of the Framework
Financial Reporting Framework
• On March 22, 2018, the Philippine SEC approved the adoption of the PFRS for
Small Entities.
• On March 26, 2018, the SEC issued SEC Memorandum Circular No. 5, Series of
2018, amending Part 1, Section 2 of SRC Rule 68, As Amended. Summarized
below are the framework applicable to each type of entity (quantitative criteria
are in millions):
Entities*
Large
Medium-sized
Small
Micro
Total assets
>₱350
>₱100 - ₱350
₱3 - ₱100
<₱3
Total liabilities
Framework
>₱250 PFRS
>₱100 - ₱250 PFRS for SME
₱3 - ₱100
PFRS for Small
Entities
Income tax basis or
<₱3 PFRS for Small
Entities
*Publicly-accountable entities have no quantitative criteria
Brief Background on PFRS for Small Entities
WHO? Who should adopt PFRS for Small Entities?
ü Small entities as defined by Philippine SEC
However, entities who have operations or investments that are based
or conducted in a different country with different functional
currency shall not apply this framework and should instead apply full
PFRS or PFRS for SMEs.
Brief Background on PFRS for Small Entities
WHAT? What are small entities? (SRC Rule 68, As Amended)
ü Small entities are those that meet all of the following criteria:
Quantitative characteristics
A
B
Total assets
₱3 million - ₱100 million, or
Total liabilities
₱3 million - ₱100 million
If the entity is a parent company, the said amounts shall be based on the
consolidated figures.
Qualitative characteristics
C
Not required to file financial statements under Part II of SRC Rule 68;
D
Not in the process of filing their financial statements for purpose of
issuing any class of instruments in public market; and
E
Not holders of secondary licenses issued by regulatory agencies
Brief Background on PFRS for Small Entities
WHO? Who can opt for exemption from mandatory
adoption of PFRS for Small Entities?
ü A small entity with group affiliations
reporting under or moving towards
þ Full PFRS or PFRS for SMEs, or
þ Full IFRS or IFRS for SMEs.
Brief Background on PFRS for Small Entities
WHO? Who can opt for exemption from mandatory
adoption of PFRS for Small Entities?
ü
Has a short term projection that show that it will breach the
quantitative thresholds and the breach is expected to be
significant and continuing due to its long-term effect on the
company’s asset size;
ü
Has been preparing financial statements using full PFRS or PFRS for
SMEs and has decided to liquidate;
ü
Such other cases that the Commission may consider as valid
exceptions from the mandatory adoption of PFRS for Small Entities.
Practice Questions
What will happen if ME or SE breaches the required SEC
quantitative threshold for the definition of a ME or SE:
q At reporting date?
q During the year?
Illustrative Example
Company A’s reporting period is December 31.
Company A’s total assets and total liabilities as at December 31, 20x2
and 20x1 are as follows:
Total assets
Total liabilities
20x2
20x1
P125,000,000
P90,000,000
70,000,000
50,000,000
Illustrative Example
Total assets
Total liabilities
20x2
20x1
P125,000,000
P90,000,000
70,000,000
50,000,000
Questions
What is the appropriate framework that Company A should adopt in 20x2 in the
following scenarios:
1. In 20x2, Company A considers the breach in total assets as significant and
continuing.
PFRS for SEs
Illustrative Example
Total assets
Total liabilities
20x2
20x1
P125,000,000
P90,000,000
70,000,000
50,000,000
2. In 20x2, Company A considers the breach in total assets as significant but not
continuing.
PFRS for SEs
Financial Statement
Presentation
Financial Statement Presentation
Complete set of FS shall include:
Statement of Financial Position
Statement of Income
Statement of Comprehensive Income
Statement of Changes in Equity
Statement of Cash Flows
Notes, comprising summary of
significant accounting policy and
other explanatory information
PFRS for
Small
Entities
PFRS for
SME
PFRS
Financial Statement Presentation
Complete set of FS shall include:
If changes to equity during the
period arise from:
w Profit or loss
w Payment of dividends
w Correction of prior year errors
and
w Changes in accounting policy
Entities may present Statement of
Income and Retained Earnings.
PFRS for
Small
Entities
PFRS for
SME
PFRS
Accounting Policies,
Estimates, and Errors
Accounting Policies, Estimates,
and Errors
PFRS for Small
Entities
PFRS for SME
PFRS
Changes in accounting policies and
Correction of prior period errors
How recognized?
Adjust the
opening balance
of current year
retained
earnings
Restate the earliest period
presented and each comparative
period as if the policy had always
applied, to the extent practicable
Is restatement of
comparative
information needed?
Is “third balance
sheet” needed*?
N/A,
restatement not
required
*Required if the entity retrospectively applies an accounting policy, restates items, or reclassifies items,
and those adjustments had a material effect on the information in the statement of financial
position/balance sheet at the beginning of the comparative period.
Inventories
Inventories
PFRS and
PFRS for
SME
PFRS for
Small entities
Measurement
Cost
Lower of
OR
Market
Probable
selling price
Cost
Lower of
OR
Estimated selling price less
cost to complete and sell
Investment Property
Investment Property
PFRS for Small Entities
PFRS for SME
PFRS
Scope
Accounting for
investments in land or
buildings that meet the
definition of investment
property.
Same
Only investment
property whose fair
value can be measured
reliably without undue
cost or effort
Same
Investment Property
PFRS for Small Entities
PFRS for SME
PFRS
Definition
Held by owner to earn
rent or for capital
appreciation or both,
rather than for:
a) use in the production
or supply of goods or
services or for
administrative purposes,
or
b) sale in the ordinary
course of business
Held by owner or by the
lessee under a finance
lease to earn rent or for
capital appreciation or
both, rather than for:
a) use in the production
or supply of goods or
services or for
administrative purposes,
or
b) sale in the ordinary
course of business.
Same with PFRS for SME
Investment Property
PFRS for Small
Entities
Initial
Measurement
PFRS for SME
PFRS
Cost
Cost
Cost
including borrowing costs
directly attributable to the
acquisition, construction or
production of a qualifying asset
FV
Subsequent
Measurement
Cost or FV
Fair value
cannot be
measured
reliably
N/A
If can be measured
reliably without
undue cost or effort
Account as PPE
at cost
Cost or FV
N/A
Investment Property
Subsequent Measurement of Investment Properties
► Assume the following for illustration purposes:
On November 10, 20x8, Entity A purchased a parcel of land, to be held for
lease, and incurred the following cost. The purchase was made on account:
Amounts in ₱
Total purchase price (sum of all installment payments)
1,500,000
Present value of installment payments
1,200,000
Transfer tax
20,000
Brokers fee
10,000
Question 1 How much should Entity A capitalize as investment property on November 10,
20x8?
Question 2 How much is the value of the investment property as of reporting date, i.e.,
December 31, 20x8?
Investment Property
Subsequent Measurement of Investment Properties
►
Question 1 How much should Entity A capitalize as investment property on
November 10, 20x8?
q
►
Answer:
₱1,230,000
Question 2 How much is the value of the investment property as of
December 31, 20x8?
q
Answer:
q
q
It depends on the Entity A’s accounting policy.
Cost method – ₱1,230,000
Fair value method – Based on the fair value as of December 31, 20x8,
changes in fair value shall be recognized in profit or loss
Property and Equipment
PFRS for Small
Entities
PFRS for SME
PFRS
Subsequent measurement options
Cost model1
Fair value model2
Revaluation model3
Changes in fair value
Fair value model1
P&L
N/A
N/A
Revaluation model2
N/A
OCI
OCI
Impairment losses
P&L
P&L
P&L
1Cost
model - cost less accumulated depreciation less impairment losses
value model - fair value at each reporting date
3Revaluation model - revalued amount less accumulated depreciation less impairment losses
2Fair
Borrowing Costs
PFRS for Small Entities
PFRS for SME
PFRS
Measurement
Must all be expensed as
incurred
Must all be expensed
as incurred
Can be capitalized if
directly attributable
to the acquisition,
construction or
production of a
qualifying asset
Employee Benefits
Employee Benefits
PFRS for Small Entities
PFRS for SME
PFRS
Definition
Accrual Approach
Defined benefit
Defined benefit
Projected Unit Credit Method
•
•
Liability is based
on Current Salary
and Years of
Service
Does not
consider future
changes in
salary rates and
service periods
Simplified Approach
•
•
•
Ignore estimated future salary
increase rates
Ignore future service of current
employees
Ignore possible in-service
mortality of current employees
Projected Unit
Credit Method
P/L or OCI
Defined contribution
Defined contribution
Provisions for discounting
Employee Benefits
Measurement of post employment benefit
► Assume the following for illustration purposes:
On December 31, 20x8, Entity A has 15 employees, which includes
Employee B. The details of Employee B is as follows:
Monthly rate
₱15,000
Equivalent half month salary per RA 7641 (22.5 days)
₱13,500
Estimated half month salary rate at estimated year of
retirement (22.5 days) [includes future salary increase]
₱23,000
Present value as of December 31, 20x8 of the estimated half
monthly salary rate at year of retirement
₱18,000
Years of service as of December 31, 20x8
Remaining years of service up to retirement
►
►
Question What is the amount of pension liability to be recognized for
Employee B as of December 31, 20x8?
Answer: ₱67,500 [₱13,500 x 5 years]
5
15
Income Taxes
Income Taxes
PFRS for Small Entities
PFRS for SME
PFRS
Current
Current
Deferred
Deferred
Policy choice using either:
Taxes Payable
Method
Deferred
Income Tax
Method
Income Taxes
Measurement of provision for income tax
► Assume the following for illustration purposes:
The statutory corporate income tax rate applicable to Entity A in 20x8 is
30%. Investment property is assumed to be an ordinary asset. All deductible
temporary differences are assessed to be recoverable. The reconciliation of
net income before income tax and taxable income for the year ended
December 31, 20x8 of Entity A is as follows:
Net income before income tax
Reconciling items:
Change in fair value of investment property
Change in fair value of investment in listed equity instruments
Provision for impairment of inventories
Interest income subject to final tax
Taxable income
►
►
Question 1 What is the provision for current income tax of Entity A?
Question 2 What is the provision for deferred income tax of Entity A if:
a. Entity A applies taxes payable method
b. Entity A applies deferred income taxes method
₱1,000,000
(100,000)
(50,000)
20,000
(15,000)
₱855,000
Income Taxes
Measurement of provision for income tax
►
Question 1 What is the provision for current income tax of Entity A?
►
Answer: ₱256,500
Taxable income
Multiply by tax rate
Provision for current income tax
₱855,000
30%
₱256,500
Income Taxes
Measurement of provision for income tax
►
Question 2 What is the provision for deferred income tax of Entity A?
►
Answer:
a. zero [All differences are treated as permanent differences]
b. ₱24,000
Change in fair value of investment property
Provision for impairment of inventories
Net temporary taxable income
Income tax rate
Provision for deferred income tax
(₱100,000)
20,000
(80,000)
30%
₱24,000
Leases
Leases
PFRS for Small Entities
PFRS for SME
PFRS
No concept of
finance lease
Leases are classified
as operating or
finance
Same with PFRS for
SME but, lessees
should apply single
model to all leases
No requirement to
recognize lease on a
straight-line basis
Lease expense or
income on a straightline basis
Right-of-use asset
with some
exemptions
Lease income or
expense is recognized
in the profit or loss in
the period in which
they are earned or
incurred
Leases
Measurement of leases
►
Assume the following information for illustration purposes:
Entity A entered into a 5 year lease agreement, as a lessor, with 5%
annual escalation. The present value of minimum lease receipts at the
inception of the lease is ₱497,000. Annual lease receipts is as follows:
Amounts in ₱
►
Year 1
100,000
Year 2
105,000
Year 3
110,250
Year 4
115,763
Year 5
121,551
Question What is the amount of rent income that Entity A should
recognize in Year 1 to Year 5 under PFRS for SE?
Leases
Measurement of leases
►
Assume the following information for illustration purposes:
Answer: rent income shall be measured as earned, as follows:
Amounts in ₱
Year 1
100,000
Year 2
105,000
Year 3
110,250
Year 4
115,763
Year 5
121,551
Under PFRS for Small Entities, there’s no concept of finance lease or straight line
recognition of leases.
Basic Financial Instruments
Basic Financial Instruments
PFRS for Small
Entities
PFRS for SME
PFRS
Accounting policy choice
No accounting
policy choice
available in
accounting for
basic financial
instruments
Provisions of
Section 11 and 12
under PAS 39
Provisions of
PFRS 9
Basic Financial Instruments
PFRS for Small Entities
PFRS for SME
PFRS
Initial measurement
Transaction Price including
transaction cost.
Same
If the arrangement constitutes
a financing transaction, at the
present value of the future
payments discounted at a
market rate of interest for a
similar debt instrument
Same
Investments in non-convertible
preference shares and nonputtable ordinary or preference
shares that are required or
permitted to be measured at
FVPL.
Same (except financial asset or
liability at fair value through
profit or loss) but, subject to
PFRS 9 para. 5.1.2A
PFRS for
SME
PFRS for
Small
Entities
Basic Financial Instruments
Debt
Instruments
Equity
Instruments
Debt
Instruments
Equity
Instruments
Amortized cost
Publicly Traded or
FV can be measured
reliably
Lower of Cost or
Fair Value
Not publicly
traded
Cost less
impairment
Amortized cost
Publicly Traded or
FV can be measured
reliably
Fair Value
Not publicly traded/
All other
investments
Cost less
impairment
Basic Financial Instruments
Debt
Derivatives
Equity
PFRS
Contractual cash flow characteristics test (at instrument level)
Business model test
(at an aggregate level)
A Hold-tocollect
contractual
cash flows
B BM with
objective that
results in
collecting
contractual cash
flows and selling
financial assets
Held for trading?
Neither
(A) nor (B)
FVOCI
option
elected?
Conditional fair value option elected?
Amortized
cost
FVOCI
(with recycling)
FVPL
FVOCI
(no recycling)
Transition to the Framework
Transition to the Framework
First-time adoption
• An entity’s first financial statements that conform to
this Framework are the first annual financial statements
in which the entity makes an explicit and unreserved
statement in those financial statements of
compliance with this Framework.
• An entity’s date of transition to this Framework is the
beginning of the earliest period for which the entity
presents full comparative information in accordance
with this Framework.
Transition to the Framework
Procedures for preparing financial statements at the
date of transition (Cont.)
►
The accounting policies that an entity uses in its opening
statement of financial position under this Framework may
differ from those that it used for the same date using its
previous financial reporting framework. The resulting
adjustments arise from transactions, other events or
conditions before the date of transition to this Framework.
Therefore, an entity shall recognize those adjustments
directly in retained earnings (or, if appropriate, another
category of equity) at the date of transition to this Framework.
Transition to the Framework
Transition date
►
January 1, 2019
►
Early application is permitted
Thank you!