ACCOUNTING FOR SME

A. INTRODUCTION
The Philippine Financial Reporting Standard for Small and Medium-sized Entities (PFRS for
SMEs) was approved by the Financial Reporting Standards Council (FRSC) in October 2009 for
implementation in the Philippines. The standard was adopted by the FRSC from the International
Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs) published by the
International Accounting Standards Board (IASB) in July 2009. The Preface to PFRS for SMEs issued by
the FRSC adopting the standard in the Philippines is presented in Appendix A. The IASB issued the IFRS
for SMEs to respond to a demand. The full IFRS were developed primarily for publicly-traded entities.
However, there are far more privately held companies than publicly-traded ones. Many private companies
prepare financial statements but, in much of the world, these statements are based on local requirements
that differ from the full IFRS.
The IASBs full IFRS were designed to meet the needs of equity investors and other users of
financial statements in public capital markets and, therefore, cover a wide range of issues, as well as a
sizeable amount of implementation guidance and disclosures appropriate for public companies.
Users of the financial statements of SMEs do not have the same needs, but are more focused on
assessing shorter-term cash flows, liquidity and solvency. In addition, many SMEs have observed that full
IFRS impose a burden on them, and that this burden has grown as IFRS have become more detailed and
more countries have begun to use them. The IASB has, therefore, developed the IFRS for SMEs with the
twin goals of meeting user needs while balancing costs and benefits from a preparer perspective.
The Philippine scenario is not different from much of the world. In consideration of the needs of
the users of financial statements of privately held companies, as well as the burden to preparers of those
financial statements, the then Accounting Standards Council (ASC, now the FRSC) provided temporary
relief to private companies referred to as non-publicly accountable entities (or NPAEs) in October
2005 by permitting entities that qualified as NPAEs not to use the full PFRS. The temporary relief was
given under Philippine Accounting Standards (PAS) 101, Financial Reporting Standards for Non-publicly
Accountable Entities. A copy of PAS 101 is presented in Appendix B.
PAS 101 previously permitted NPAEs to apply the applicable financial reporting standards
effective as of December 31, 2004, i.e., NPAEs were given the option to apply or not to apply any new
FRSC pronouncements that became effective after December 31, 2004.
Upon the adoption of the PFRS for SMEs, PAS 101 was withdrawn; hence it is no longer
applicable in the Philippines.
This Accounting Alert aims to provide concerned entities with some guidance in using the PFRS
for SMEs, mainly by providing discussions on the differences between the PFRS for SMEs and the full
PFRS on one hand, and between the PFRS for SMEs and PAS 101 on the other hand, as well as some
issues relating to transitioning to the PFRS for SMEs.

B. WHO CAN USE THE PFRS FOR SME?

The PFRS for SMEs does not itself deal with this question. It provides instead that the decision as
to which entities are required or permitted to use the PFRS for SMEs will rest with legislative and
regulatory authorities and standard-setters in individual jurisdictions.
However, it does contain a clear definition of the class of entity for which the standard is intended
(see definition of the term small and medium sized entities in Section C). This definition is essential so
that (a) the IASB can decide on the accounting and disclosure requirements that are appropriate for that
class of entity, and (b) the legislative and regulatory authorities, standard-setters, reporting entities and
their auditors will be informed of the intended scope of applicability of the standard.

The Philippine Securities and Exchange Commission (SEC), in a notice to the public issued on
December 11, 2009 (see Appendix C), announced that the Commission En Banc in its meeting on
December 3, 2009 resolved to adopt the PFRS for SMEs as part of its rules and regulations. The SEC
Notice also included a definition of small and medium sized entities that includes size criteria (see
Section C).
In the abovementioned notice of December 11, 2009, the SEC required entities that meet the
definition of SMEs to apply the PFRS for SMEs as of the effective date (which was set for annual periods
beginning January 1, 2010 see Section D). This requirement has been clarified by the SEC to mean
that entities qualifying as SMEs shall use the PFRS for SMEs; such entities are not allowed to use other
financial reporting frameworks, such as the full PFRS, for their general purpose financial statements. This
requirement is somewhat restrictive, but for the SEC, this fulfills the goal to allow comparability of financial
statements of SMEs.
The SEC, however, provided exemptions from the mandatory adoption of PFRS for SMEs to
SMEs that meet certain criteria. The SEC notice to the public issued on October 11, 2010 (see Appendix
F) provides a list of those SMEs that are exempted, which include the following:
An SME is part of a group, either as a subsidiary, associate or jointly controlled entity, reporting under
full PFRS;
An SME is a subsidiary or branch office of a foreign subsidiary that will be moving towards IFRS
pursuant to the foreign countrys published convergence plan;
An SMEs short-term projections show that it will breach the quantitative thresholds set in the criteria for
SME, and the breach is expected to be significant and continuing due to its long-term effect on
the entitys total assets or liabilities;
An SME has concrete plans to conduct an initial public offering within the next two years;
An SME has a subsidiary that is mandated to report under full PFRS; and
An SME has been preparing financial statements using full PFRS and has decided to liquidate its
assets.
C. WHAT ARE THE SMALL AND MEDIUM ENTERPRISE?
SMEs as defined in PFRS for SMEs
As defined in the PFRS for SMEs, the term Small and Medium-sized Entities (or SMEs) is not
associated with any size criteria.
Small and medium-sized entities are instead defined under the PFRS for SMEs as entities that:
a. do not have public accountability, and
b. publish general purpose financial statements for external users.
An entity has public accountability if:
a. it files, or it is in the process of filing, its financial statements with a securities
commission or other regulatory organization for the purpose of issuing any class
of instruments in a public market; or
b. it holds assets in a fiduciary capacity for a broad group of outsiders as one of its
primary businesses. This is typically the case for banks, credit unions, insurance
companies, securities brokers/dealers, mutual funds and investment banks.
Entities holding assets in a fiduciary capacity for reasons incidental to a primary
business are not, however, considered to be publicly accountable and, hence,
can use the PFRS for SMEs. Examples of where this may be the case are travel
or real estate agents, schools, charitable organizations, cooperative enterprises
requiring a nominal membership deposit and sellers that receive payment in
advance of delivery of goods and services such as utility companies.
SMEs as defined by the Philippine SEC
As mentioned earlier, the above definition of SMEs under the PFRS for SMEs does not include
any size criteria. However, the Philippine SEC, in its notice of December 11, 2009 cited earlier, adopted
the Following definition of small and medium-sized entities that includes size criteria:

1. The entity has total assets of between P3 million and P350 million or total liabilities of between
P3 million and P250million;
2. It is not required to file financial statements under SRC Rule 68.1;
3. It is not in the process of filing its financial statements for the purpose of issuing any class of
instruments in a public market;
4. It is not a holder of a secondary license issued by a regulatory agency, such as a bank (all
types of banks), an investment house, a finance company, an insurance company, a
securities broker/dealer, a mutual fund and a pre-need company; and
5. It is not a public utility. The above SEC definition of SMEs is essentially the same as the
definition of NPAEs adopted by the then Accounting Standards Council (now the
FRSC) under PAS 101, with the exception of the amounts set for the size criteria. For
the definition of SMEs, the size criteria set by the SEC include a floor (P3 million for
both total assets and total liabilities) and a ceiling (P350 million for total assets
and P250 million for total liabilities). For the definition of NPAEs, the size criteria were
pegged at a single amount for total assets (P250 million) and total liabilities (P150
million); there was no ceiling or floor similar to that provided for the definition of SMEs.
This difference in size criteria has some implications with regard to the implementation in the
Philippines of the PFRS for SMEs, specifically on the matter relating to transition to the PFRS for SMEs
(see relevant discussion in Section J).
D. WHEN DOES THE PFRS FOR SME TAKES PLACE?
The SEC has set the effective date of PFRS for SMEs for annual periods beginning January 1,
2010. This effective date was later on revised by the SEC to allow early application of the PFRS for SMEs
in 2009 as long as the SMEs are capable, in terms of systems and resources, to efficiently transition to
PFRS for SMEs and provided the impact of the early adoption is disclosed in the financial statements
(see related discussion under Philippine SEC Implementation Guidelines in Section J).
E. WHAT ARE THE COMPONENTSOF AN SMES FINANCIAL STATEMENTS?
The PFRS for SMEs defines what statements and disclosures shall be presented as part of a complete
set of financial statements, which are the same components required under the full PFRS. These include
the following:
a statement of financial position as at the reporting date;
either (i) a single statement of comprehensive income or (ii) a separate income statement and a
separate statement of comprehensive income;
a statement of changes in equity for the reporting period;
a statement of cash flows for the reporting period, with the cash flows from operating activities
presented using either the indirect method (i.e., profit or loss is adjusted for the effects of
non-cash transactions, any deferrals or accruals of past or future operating cash receipts
or payments, and items of income or expenses associated with investing or financing
cash flows) or the direct method (i.e., major classes of gross cash receipts and gross
cash payments are disclosed); and
notes, comprising a summary of significant accounting policies and other explanatory
information.
In general, comparative information is required in respect of the previous comparable
period
for all amounts presented.
As a simplification in comparison to full PFRS, where the only changes to equity during the
periods for which financial statements are presented arise from profit or loss, payment of dividends,
corrections of prior period errors, and changes in accounting policy, the entity may present a single
statement of income and retained earnings in place of a separate statement of comprehensive income
and a statement of changes in equity.

F. WHAT ARE THE GENERAL RECOGNITION AND MEASUREMENT PRINCIPLES UNDER PFRS
FOR SMES?
The PFRS for SMEs has been designed essentially to work as a stand-alone document, with no
mandatory cross references to full PFRS. Where full PFRS permits a number of possible accounting
options for a particular transaction, the standard presents SMEs with a simplified version of the full
requirements and reduces the number of options available to them.
The requirements contained in the PFRS for SMEs for recognizing and measuring assets,
liabilities, income and expenses are based on pervasive principles that are derived from the FRSCs
Framework for the Preparation and Presentation of Financial Statements and from the full PFRS.
Where the PFRS for SMEs does not contain a requirement that applies specifically to a
transaction or other event or condition, the standard requires that management applies judgment in
developing an accounting policy that results in information that is relevant and reliable.
In making such a judgment, a hierarchy is provided, with management being advised to refer to
and consider the applicability of the following sources in descending order:
a. the requirements and guidance in the PFRS for SMEs dealing with similar and related issues,
and
b. the definitions, recognition criteria and measurement concepts for assets, liabilities, income
and expenses and the pervasive principles in the section in the IFRS for SMEs on
Concepts and Pervasive Principles.
In making the judgment, management may also consider the requirements and guidance in the
full PFRS dealing with similar and related issues, but this is not mandatory.
G. HOW DOES THE PFRS FOR SMES DIVERGE FROM THE FULL PFRS?
Compared to the full PFRS, the PFRS for SMEs contains a number of simplifications. Principal
among these are using simplified drafting in writing the standard, making the final document easier to
understand and follow, and reducing the number of disclosures to be made when preparing the financial
statements.
The IASB has indicated that future revisions to the IFRS for SMEs (from which the PFRS for
SMEs is adopted) will be made once every three years, providing a stable platform to both preparers and
users of financial statements prepared under the standard. The IASB also indicated that it expects to
undertake a thorough review of the SMEs experience in applying the IFRS for SMEs when two years of
financial statements using the standard have been published by a broad range of entities. The IASB
expects that it will then propose amendments to address then implementation issues identified in that
review. It will also address issues arising from new and amended IFRS that are published in the
intervening period.
Any such amendments made by the IASB are expected to be adopted by the FRSC for
implementation by SMEs in the Philippines.

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

PFRS for SMEs

Numbered by standard

Organized by topic
(e.g., inventories)
Around 300 potential
disclosures

Around 3,000 potential

disclosures
Around 2,800 pages in
length

Less than 230 pages

Updated several times

a year

Anticipated to be
updated on a
yearly basis

three

A snapshot of the PFRS for SMEs containing the section no., title and description of the various
sections of the standard is presented in Appendix D.
Topics omitted
The PFRS for SMEs also omits a number of topics found in the full PFRS that are not considered
relevant to the needs of small and medium-sized entities. Topics omitted from the PFRS for SMEs are:
Segment reporting
Interim reporting
Earnings per share
Insurance
Assets held for sale
Differences in specific areas of recognition and measurement guidance
The following paragraphs set out some particular areas of interest, where the requirements in the
PFRS for SMEs diverge from those of the full PFRS. The issues listed are by no means exhaustive, and
reference should be made to the text of the standard itself for a proper understanding of all the potential
differences that may arise.
Financial instruments (Sections 11 and 12)
In seeking to meet user needs while balancing costs and benefits from a preparers perspective,
the PFRS for SMEs divides its requirements on financial instruments into two sections one dealing with
basic financial instruments and the other with more complex financial instruments and transactions.
Examples of financial instruments that are normally considered basic financial
instruments (covered under Section 11 of the PFRS for SMEs) include:
Cash
Demand and fixed-term deposits when the entity is the depositor (e.g., banks accounts)
Commercial paper and commercial bills held
Accounts, notes and loans receivable and payable (including loans to or from subsidiaries or
associates that are due on demand)
Bonds and similar debt instruments
Investments in nonconvertible preference shares and non puttable ordinary and
preference shares
Commitments to receive a loan if the commitment cannot be net settled in cash
Examples of financial instruments that will normally be considered more complex financial
instruments and transactions (covered under Section 12) include:
Asset-backed securities, such as collateralized mortgage obligations, repurchase
agreements and securitized packages of receivables
Options, rights, warrants, futures contracts, forward contracts and interest rate swaps that can
be settled in cash or by exchanging another financial instrument
Financial instruments that qualify and are designated as hedging instruments
Commitments to make a loan to another entity
Commitments to receive a loan if the commitment can be net settled in cash
The PFRS for SMEs gives entities a choice to apply either:
A. the provisions of both Sections 11 and 12 of the PFRS for SMEs in full, or

B. the recognition and measurement provisions of PAS 39, Financial Instruments: Recognition and
Measurement.
Where an entity does choose to adopt the recognition and measurement provisions of PAS 39,
however, it still makes the disclosures for financial instruments that are required by Sections 11 and 12 of
the PFRS for SMEs rather than those in PFRS 7, Financial Instruments: Disclosures.
Basic financial instruments (Section 11)
Under PFRS for SMEs, basic financial instruments are categorized as either measured at:
a. amortized cost or cost less impairment; or
b. fair value with changes in fair value recognized in profit or loss (this will cover investments in
nonconvertible and non-puttable preference shares and nonputtable ordinary shares that
are publicly traded or whose fair value can otherwise be measured reliably).
Under the full PFRS, there are four categories of financial instruments, for example:
a. a financial asset or financial liability at fair value through profit or loss
b. held-to-maturity investments (carried at amortized cost)
c. loans and receivables (carried at amortized cost)
d. available-for-sale financial assets (carried at fair value)
(As additional information, the IASB has completed the initial phase of its project to replace IAS
39 in its entirety. The initial phase addresses the classification and measurement of financial assets,
reducing the complexity in accounting for financial instruments by having fewer categories of financial
assets and principle based approach to their classification.
Under this new requirement, this will take effect when the other phases of the project are
completed and become effective, entities are required to classify a financial asset at either amortized cost
or fair value on the basis of the entitys business model for managing the financial asset, and the
contractual cash flow characteristics of the financial asset.)
Other financial instruments Issues (Section 12)
In general, financial instruments that do not meet the criteria set out in the PFRS for SMEs for
treatment as basic financial instruments are subsequently measured at fair value at the end of each
reporting period, with changes in their fair value being recognized in profit or loss. (The equivalents of
PAS 39s classifications on available-for-sale financial assets and held-to-maturity investments are not
included in the PFRS for SMEs.)
Section 12 of PFRS for SMEs also sets out the conditions that must be met for hedge accounting
to be used and how it is to be applied. Compared with PAS 39, the guidance contained in PFRS for SMEs
is a simplified version but is more restrictive as it permits hedge accounting only for certain specified risks
and only if the hedging instrument complies with all the prescribed terms and conditions.
Investments in associates (Section 14)
The PFRS for SMEs contains an accounting policy election in respect of investments in
associates. This applies to the accounting in consolidated financial statements and in the financial
statements of an investor that is not a parent but has an investment in one or more associates.
Under the accounting policy election for investments in associates, an investor shall account for
all such investments under either:
The cost model (cost less any accumulated impairments losses);

 The equity model (initial recognition at the transaction price, with subsequent adjustments to reflect the
investors share of the profit or loss and other comprehensive income of the associate); or
The fair value model. The cost model should not be applied to investments in associates for which
there is a published price quotation (the fair value model must be used where this is the case).
Under the full PFRS, there are no similar options provided in PAS 28, Investments in Associates.
Instead, investments in associates are required to be accounted for using the equity method.
Investments in joint ventures(Section 15)
A similar accounting policy election (allowed for investments in associates see above) applies
to investments in jointly controlled entities (JCEs). The PFRS for SMEs does not permit the use of
proportionate consolidation.
Under the full PFRS, PAS 31, Interests in Joint Ventures, a venture shall recognize its interest in
a JCE using proportionate consolidation or, as an alternative, the equity method. (As additional
information, there is a proposed amendment to PAS 31 to eliminate the proportionate consolidation
method as an alternative for measurement of interests in joint ventures.)
Investment property (Section 16)
Under the PFRS for SMEs, investment property with fair value that can be measured reliably
without undue cost or effort on an ongoing basis is accounted for at fair value, with changes in fair value
being accounted for through profit or loss. (It is not possible to elect to use the cost-depreciation
impairment model for such property.)
All other investment properties are accounted for as property, plant and equipment using the cost
depreciation- impairment model.
Under PAS 40, Investment Property, with certain exceptions, an entity shall measure its
investment property using either the fair value model or the cost model. The accounting policy chosen
shall be applied to all of the investment properties.
Property, plant and equipment(Section 17)
Items of property, plant and equipment are measured under the PFRS for SMEs using the cost
depreciation- impairment model.
There is no option to use a revaluation model.
On the other hand, full PFRS under PAS 16, Property, Plant and Equipment, allows
measurement of property, plant and equipment using either the cost model or the revaluation model. The
accounting policy chosen shall be applied to an entire class of property, plant and equipment.
Intangible assets other than goodwill (Section 18)
Initial measurement
Under full PFRS, PAS 38, Intangible Assets, allows the recognition of an intangible asset from
development (or from the development phase of an internal project) when certain conditions are complied
with. The PFRS for SMEs, on the other hand, requires an entity to recognize an expenditure incurred
internally on an intangible item, including all expenditures for both research and development activities,
as an expense when it is incurred, unless it forms part of the cost of another asset that meets the
recognition criteria under the PFRS for SMEs.

The criteria for recognition as assets are always considered satisfied for intangible assets that are
separately acquired. Intangibles acquired in a business combination are normally recognized as assets
on the assumption that their fair value can be measured with sufficient reliability.
Measurement after recognition For those that meet the criteria for recognition as assets, the
PFRS for SMEs requires intangible assets to be measured at cost less accumulated amortization and
accumulated impairment losses. For the purpose of the PFRS for SMEs, all intangible assets are
considered to have a finite useful life. Where an entity is unable to make a reliable estimate of the useful
life of an intangible asset, the life is presumed to be ten years.
PAS 38, on the other hand, allows an entity to choose either the cost model or the revaluation
model in valuing intangible assets. Intangible assets with finite useful lives are amortized over their useful
lives; those with infinite useful lives are not amortized.
Business combinations and goodwill (Section 19)
Under the PFRS for SMEs, the acquirer in a business combination is required to allocate the cost
of a business combination at the acquisition date, by recognizing the acquirees identifiable assets and
liabilities and a provision for those contingent liabilities that satisfy the recognition criteria under the PFRS
for SMEs at their fair values at that date.
Any excess of the cost of the business combination over the acquirers interest in the net fair
value of the identifiable assets, liabilities and provisions for contingent liabilities so recognized shall be
accounted for as goodwill (positive); any excess of the acquirers interest in the net fair value of the
identifiable assets, liabilities and provisions for contingent liabilities over cost shall be accounted for as
the so-called negative goodwill. Where a negative goodwill is identified, the identification and
measurement of the acquirees assets, liabilities and contingent liabilities and the measurement of the
cost of the combination is first of all reassessed. After this reassessment, any remaining negative goodwill
is recognized immediately in profit or loss.
After initial recognition, the acquirer shall measure goodwill acquired in a business combination at
cost less accumulated amortization and accumulated impairment losses. Where an entity is unable to
make a reliable estimate of the useful life of goodwill, the life is presumed to be ten years. The process for
the determination of goodwill or negative goodwill under the PFRS for SMEs is generally similar to that in
the full PFRS under PFRS 3, Business Combinations.
However, under PAS 38, Intangible Assets, intangible assets with indefinite useful lives are not
amortized; therefore, goodwill, being considered as having indefinite useful life, is not amortized under the
full PFRS. Additionally, PAS 36, Impairment of Assets, requires annual testing of goodwill acquired in
business combination for impairment, irrespective of whether there is any indication of impairment. The
requirement under the PFRS for SMEs to amortize goodwill is an important simplification compared to the
requirements in full IFRS, as it eliminates the need for a detailed annual impairment test.
Under the PFRS for SMEs, an impairment test is only needed for goodwill where there is an
indicator of impairment.
Impairment of goodwill (Section 27)
In testing for impairment of goodwill (in cases where there is an indicator of impairment), the
PFRS for SMEs requires that where goodwill cannot be allocated to individual cash generating units (or
groups of cash-generating units) on a non-arbitrary basis, then for the purpose of testing goodwill, a
reporting entity tests impairment by determining the recoverable amount of either:
a. the acquired entity in its entirety, if the goodwill relates to an acquired entity that has not been
integrated (integrated means the acquired business has been restructured or dissolved into
the reporting entity or other subsidiaries), or

B. the entire group of entities, excluding any entities that have not been integrated, if
relates to an entity that has been integrated.

the

goodwill

This treatment allows goodwill to be allocated and tested for impairment at a higher level than
that required by full PFRS under PAS 36 where goodwill is allocated to the lowest level within the entity at
which the goodwill is associated and monitored for internal management purposes.
Borrowing costs (Section 25)
The PFRS for SMEs requires an entity to recognize all borrowing costs as an expense in profit or
loss in the period in which they are incurred. Capitalization of borrowing costs is not permitted.
The full PFRS, under PAS 23, Borrowing Costs, requires an entity to capitalize borrowing costs
that are directly attributable to the acquisition, construction or production of a qualifying asset as part of
the cost of that asset. Other borrowing costs are recognized as expense in the period when incurred. A
qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended
use or sale.
Share-based payment (Section 26)
The requirements for the recognition and measurement of share-based payment under the PFRS
for SMEs are based on those contained in the full PFRS, under PFRS 2, Share-based Payment.
The PFRS for SMEs does, however, provide simplified guidance on measuring the fair value of
share options and other forms of share based payment with the following
three-tier measurement hierarchy:
a. If an observable market price is available for the equity instruments granted, that price shall be
used.
b. If an observable market price is not available, the fair value of share options granted shall be
measured using entity specific observable market data such as for a recent transaction in the
share options.
c. If an observable market price is not available and obtaining a reliable measurement of fair value
under (b) is impracticable, an entity shall indirectly measure the fair value of share options
using an option pricing model. The inputs for the model should use market data to the
greatest extent possible.
A similar hierarchy applies to the measurement of shares and share appreciation rights.
Employee benefits (Section 28)
Determination of cost for the period for defined benefit plans. Under the PFRS for SMEs, for
defined benefit plans the determination of the defined benefit liability (or asset) and related cost of the
defined benefit plan is much simpler than that in the full PFRS under PAS 19, Employee Benefits. An
SMEs cost of its defined benefit plans for the period is simply computed as the net change in its defined
benefit liability during the period (the latter being determined as the present value of the obligations
minus the present value of plan assets at the reporting date).
Allocation of actuarial gains and losses
The PFRS for SMEs gives entities an accounting policy election in respect of the allocation of
their actuarial gains and losses. Under this election, an entity shall either:
A. recognize all actuarial gains and losses in profit or loss, or
B. recognize all actuarial gains and losses in other comprehensive income In computing the defined
benefit liability under PAS 19, a limit is applied to the portion of actuarial gains and losses that
can be recognized in profit or loss (referred to as the corridor approach).

Under the PFRS for SMEs, there is no ability to use such corridor approach. (As additional
information, there is a proposed amendment to PAS 19 to remove the corridor approach.)
Actuarial valuation model
If an entity is able, without undue cost or effort, to use the projected unit credit method (which is
the method required by PAS 19) to measure its defined benefit obligation and the related expense, it shall
do so.
However, where an entity is unable to do so without undue cost or effort, it is permitted to make
the following simplifications in measuring its defined benefit obligation with respect to current employees.
It may:
ignore estimated future salary increases;
ignore future service of current employees; and
ignore possible in-service mortality of current employees between the reporting date and the date
employees are expected to begin receiving postemployment benefits. However, mortality after
service (i.e., life expectancy) will still need to be considered.
The PFRS for SMEs does not require an independent actuary to be engaged to perform the
actuarial valuation, nor does it require a comprehensive actuarial valuation to be performed annually. If
the principal actuarial assumptions have not changed significantly during the periods between actuarial
valuations, the defined benefit obligation can be measured by adjusting the prior period measurement for
changes in employee demographics such as number of employees and salary levels.
Income tax (Section 29)
The PFRS for SMEs requires SMEs to measure deferred tax assets and liabilities at an amount
that includes the effect of possible outcomes of a review by the tax authorities since the uncertainty about
whether the tax authorities will accept the amounts reported to them by the entity affects the amount of
the current tax and deferred tax.
The entity shall use the probability weighted average amount of all possible outcomes. The effect
on deferred tax expense arising from a change in the effect of the possible outcomes of a review by the
tax authorities shall be disclosed.
The full PFRS at present does not include the above-mentioned requirements (sometimes
referred to as uncertain tax positions).
However, there is another standard (PAS 37, Provisions, Contingent Liabilities and Contingent
Assets) that applies as well to income tax matters that may result in the recognition or disclosure of
contingencies relating to taxes.
SUMMARY OF MAIN AREAS OF DIFFERENCES IN RECOGNITION AND MEASUREMENT
GUIDANCE
The following table summarizes some of the main simplifications made in the PFRS for SMEs, as
well as some examples of options available under full PFRS that are not included in the PFRS for SMEs:
Subject

Full PFRS

PFRS for SMEs

Basic financial
instruments

There are four categories of

financial instruments.

There are two categories, i.e.,

(a) Amortized cost or cost less
impairment, and (b) fair value
through profit or loss.

Hedge accounting is only possible

Rules on the use of hedge

Other financial
instruments issues

Where strict documentation and

effectiveness requirements are met.

accounting are much simplified

(Although more restricted).
Allows option to use PAS 39 for
recognition and measurement (if this
option is taken, SME still makes
disclosures required under PFRS for
SMEs and not under PFRS 7).

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

Requires use of equity method of

accounting

Option to account for investments

at:
(a) cost;
(b) under the equity method; or
(c) at fair value through
profit or loss (compulsory where a
quoted price is available)

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

Option to account for investments

at:
(a) proportionate consolidation; or
(b) under the equity method

Option to account for investments

at:
(a) cost;
(b) under the equity
method; or
(c) at fair value through
profit or loss (compulsory where a
quoted price is available)
No proportionate consolidation
Option

Investment property

Option to measure asset at:

(a) cost depreciation- impairment
model; or
(b) fair value model

Must be accounted for at fair value

if such a value is available without
undue cost or effort. Cost model
should be used only when fair value
is not available.
Measurement at cost or fair value is
driven by circumstances (i.e.,
availability of fair value without
undue cost or effort) rather than by
choice.

Property, plant and

equipment

Option to measure asset at: (a) the

cost model; or (b) revaluation model

Requires use of the cost

depreciation- impairment model
No revaluation option

Intangible assets other

than goodwill

Development costs are capitalized

where the six specific criteria are
met.
Option to measure asset at: (a) the
cost model; or (b) revaluation model
Intangible asset with infinite life is
not amortized but impairment testing
is required annually, and whenever
indicator of impairment exists.

Expenditures incurred internally on

intangible item, including all research
and
development
costs,
are
expensed.
Requires subsequent measurement
of capitalized intangible assets
(such as those separately acquired)
at cost less accumulated
amortization and impairment losses
No revaluation option for capitalized

intangible assets
All intangible assets are considered
to have a finite life, hence, are
amortized. If there is no reliable
estimate of useful life, presumed life
is ten years.

Business combinations
and goodwill

Goodwill is not amortized.

Impairment testing is required
annually, and whenever indicator of
impairment exists.
Goodwill is allocated to and tested
for impairment at the lowest level
within the entity at which goodwill is
associated and monitored for internal
management purposes.

Goodwill is amortized (presumed

life of ten years is used where
reliable estimate of useful life cannot
be made).
Impairment testing is only needed
when indicator of impairment exists.
Goodwill is allocated and tested for
impairment at a higher level.

Borrowing costs

Borrowing costs directly attributable

to acquisition, construction or
production of a qualifying asset are
capitalized.
Other borrowing costs are
expensed when incurred

All borrowing costs are expensed.

Share-based payment

In case market prices are not

available, fair value of shares and
share options is estimated using a
valuation technique that incorporates
all relevant factors and assumptions.
Detailed guidance on many valuation
issues is provided.

A simplified guidance (i.e., a threetier measurement hierarchy) for

measuring the fair value of share
options and other form of share
based payment is provided.

Post-employment
defined benefit plans

Actuarial gains and losses are not

recognized as an income or expense
unless unrecognized gain or loss
exceeds 10% of the greater of the
defined benefit obligation and fair
value of plan assets. The amount
exceeding this 10% corridor is
charged or credited to profit or loss
over the employees expected
average remaining working lives, or
through any systematic method that
results in faster recognition of
actuarial gains or losses.

The corridor approach for

recognizing actuarial gains and
losses is not permitted. Any change
in the defined benefit liability is
recognized as the cost of the defined
benefit plan for the period.

Income tax

There is no specific provision on

consideration (and disclosure) of the
effect of uncertain tax positions (i.e.,
possible outcomes of a review by tax
authorities) on deferred tax
accounts.

Requires measurement of deferred

tax assets and liabilities at an
amount that includes the possible
effect of uncertain tax positions and
requires disclosure of related
information in the financial
statements.

H. HOW DOES THE PFRS FOR SMES DIFFER FROM PAS 101?
As mentioned in Section A earlier, PAS 101 previously permitted NPAEs to apply the applicable
financial reporting standards effective as of December 31, 2004, i.e., NPAEs were given the option to
apply or not to apply any new FRSC pronouncements that became effective after December 31, 2004.
Having been given such an option:
Some NPAEs adopted the pronouncements effective as of December 31, 2004 but did not adopt any
new pronouncements made effective after December 31, 2004;
Other NPAEs adopted the pronouncements effective as of December 31, 2004 and applied some new
standards made effective after December 31, 2004; while
Some other NPAEs applied the full PFRS. Those NPAEs that now qualify as SMEs under the PFRS for
SMEs are required to apply the PFRS for SMEs, except for those entities exempted by the SEC
from the mandatory adoption of the PFRS for SMEs (see discussion in Section B and Appendix
F).
For the guidance of NPAEs that previously used PAS 101, we present below some of the major
differences between PAS 101 and the PFRS for SMEs. (For NPAEs that previously used the full PFRS
and are now required to use the PFRS for SMEs, the discussions in Section G above will be relevant.)
The issues listed below are by no means exhaustive and, therefore, reference should be made to the text
of the relevant standards for a proper understanding of those issues.
Size criteria The size criteria for NPAEs (as the term is used and defined under PAS 101) were
pegged at a single amount for total assets (P250 million) and total liabilities (P150 million); there
was no ceiling or floor similar to that provided for SMEs (as the term is defined and used under
the PFRS for SMEs). The size criteria for SMEs include a floor (P3 million for both total assets
and total liabilities) and a ceiling (P350 million for total assets and P250 million for total liabilities).
Option to choose financial reporting framework/ standards NPAEs were given the option to apply
accounting standards effective as of December 31, 2004 and to apply or not to apply any new FRSC
pronouncements that became effective after December 31, 2004, or to apply the full PFRS. Qualifying
SMEs, on the other hand, are required to apply the PFRS for SMEs, save for those entities that are
exempted by the SEC from the mandatory adoption of the PFRS for SMEs (see Section A and Appendix
F).
Components of financial statements NPAEs financial statements do not include a statement of
comprehensive income.
SMEs financial statements shall include either a single statement of comprehensive income or two
statements, i.e., a separate statement of income and a separate statement of comprehensive income.
Valuation of inventories The last-in, first-out (LIFO) method was allowed as an alternative valuation for
inventories of NPAEs. The PFRS for SMEs does not include the LIFO method as an alternative inventory
valuation method.
Financial assets The terminologies, recognition and measurement principles, presentation and
disclosures of financial assets allowed for NPAEs are very different from those required under the PFRS
for SMEs. Financial assets of NPAEs were categorized as either marketable securities (current) that were
measured at the lower of cost or market with the unrealized losses recognized in profit or loss; or
marketable securities (noncurrent) that were measured at the lower of cost or market with the unrealized
losses taken into the equity section of the balance sheet and other long-term investments that were
accounted for under the equity method or the cost method. Disclosures required were minimum and not
detailed. SMEs, on the other hand, have the option to follow PAS 39, or the relevant provisions under the
PFRS for SMEs (which are also based on PAS 39). Those requirements, while simplified for SMEs, are
definitely more complex and detailed than those allowed the NPAEs under PAS 101.

 Borrowing costs NPAEs were allowed to capitalize borrowing costs attributable to qualifying assets.
Borrowing costs incurred by SMEs are required to be charged to expense when incurred; capitalization of
borrowing costs is not allowed.
Income taxes There is no requirement for NPAEs to consider (and disclose) the effect of uncertain tax
positions (i.e., possible outcomes of a review by tax authorities) on deferred tax accounts.
The PFRS for SMEs requires an SME to measure deferred tax assets and liabilities at an amount that
includes the possible effect of uncertain tax positions and to make the related disclosures in the financial
statements.
Plant, property and equipment NPAEs were allowed to revalue plant, property and equipment (as an
alternative to using the cost method). They were not required to de-componentize the fixed assets when
computing depreciation. (Decomponentization refers to the process wherein major components of a fixed
asset are identified, cost is allocated to such components, and the components are depreciated over their
specific useful lives.)
The PFRS for SMEs eliminates the revaluation method as an alternativemmeasurement of property, plant
and equipment of SMEs. It requires decomponentization for purposes of depreciation computation.
Goodwill and other intangible assets For NPAEs, goodwill arising from business combinations (as well
as other intangible assets) was allowed to be amortized over a period of 20 years unless the use of a
useful life of more than 20 years could be justified.
For SMEs, goodwill and other intangibles qualifying for recognition are also allowed to be amortized;
amortization period is over the estimated useful life, or ten years if useful life cannot be estimated.
Consolidated financial statements Minority interests were presented in the consolidated financial
statements of an NPAE between the liability section and the equity section of the balance sheet.
Under the PFRS for SMEs, non-controlling interests (the new term for minority interests) are presented
under the equity section of the statements of financial position.
Investments in associates Investments in associates were required to be accounted for under the
equity method in consolidated financial statements of an NPAE.
Under the PFRS for SMEs, there are options in the measurement of investments in associates in
consolidated financial statements: cost model, equity model and the fair value model.
Interests in joint ventures NPAEs were allowed to carry interests in joint ventures using the
proportionate consolidation method or the equity method. The PFRS for SMEs does not allow
proportionate consolidation in accounting for interests in joint ventures. Options allowed are the same as
in accounting for investments in associates as presented above.
I. WHAT SPECIALIZED ACTIVITIES ARE COVERED IN THE PFRS FOR SMES?
Section 34 of the PFRS for SMEs deals with the following specialized activities:
a. agriculture
b. extractive activities
c. service concession arrangements
In relation to agricultural activity, the PFRS for SMEs requires fair value to be used for biological
assets where fair value is readily determinable without undue cost or effort. All other biological assets are
accounted for at cost.
The pronouncements effective as of December 31, 2004 applied by most NPAEs did not include
standards that deal with the above specialized activities.

J. HOW WILL ENTITIES TRANSITION TO THE PFRS FOR SMES?

The default position under the PFRS for SMEs is that an entity shall, in its opening statement of
financial position as of its date of transition (being the beginning of the earliest period for which the entity
presents full comparative information):
A. recognizes all assets and liabilities whose recognition is required by the PFRS for SMEs;
B. not recognizes items as assets or liabilities if the PFRS for SMEs does not permit such recognition;
C. reclassify items that it recognized under its previous financial reporting framework as one type of asset,
liability or component of equity, but are now a different type of asset, liability or component of
equity under the PFRS for SMEs; and
D. applies the PFRS for SMEs in measuring all recognized assets and liabilities.
The accounting policies that an entity uses in its opening statement of financial position prepared
in accordance with the PFRS for SMEs may differ from those that it used for the same date using its
previous financial reporting framework. The transition to the PFRS for SMEs, therefore, will result in
adjustments that arise from transactions, other events or conditions that occurred before the date of
transition to the PFRS for SMEs; such adjustments are recognized directly in retained earnings (or, if
appropriate, another category of equity) at the date of transition to the PFRS for SMEs.
The PFRS for SMEs does, however, contain certain exemptions and simplifications that apply
only to a first-time adopter of the PFRS for SMEs. (An entity is a first-time adopter where it prepares its
annual financial statements in accordance with the PFRS for SMEs for the first time, regardless of
whether its previous accounting framework was full PFRSs or another set of accounting framework.)
Areas where retrospective application is prohibited On first-time adoption of the PFRS for SMEs,
an entity shall not retrospectively change the accounting that it followed under its previous financial
reporting framework for any of the following transactions:
derecognition of financial assets and financial liabilities
hedge accounting
accounting estimates
discontinued operations
measuring non-controlling interests
Optional exemptions
An entity may use one or more of a number of exemptions in preparing its first financial
statements that conform to the PFRS for SMEs. These exemptions are similar to those contained in
PFRS 1, Firsttime Adoption of Philippine Financial Reporting Standards. Disclosure on first-time adoption
In order to explain the process of transition, the PFRS for SMEs contains requirements for a firsttime
adopter to disclose a number of reconciliations to its most recent financial statements prepared under its
previous financial reporting framework.
If it is impracticable for an entity to restate the opening statement of financial position at the date
of transition in accordance with the requirements of the PFRS for SMEs, the entity shall apply the
procedures for preparing financial statements at the date of transition in the earliest period for which it is
practicable to do so, and shall identify the data presented for prior periods that are not comparable with
the data that conforms to the PFRS for SMEs.
Philippine SEC implementation guidelines
A number of issues have emerged regarding transitioning of entities to the PFRS for SMEs.
Entities that need to transition to the PFRS for SMEs generally will fall under one of the following
categories:

 Entities that previously qualified as NPAEs and used PAS 101 now qualify as SMEs; these entities will
transition from PAS 101 to the PFRS for SMEs.
Entities that previously qualified as NPAEs and used PAS 101 now do not qualify as SMEs because
they crossed the ceiling for the size criteria for SMEs; these entities will transition from PAS 101
to the full PFRS.
Entities that previously qualified as NPAEs but opted to use full PFRS now qualify as SMEs; these
entities (with the exception of entities that are exempted by the SEC from the mandatory adoption
of the PFRS for SMEs) will transition from the full PFRS to the PFRS for SMEs.
Entities that did not previously qualify as NPAEs because they exceeded the size criteria and, hence,
used the full PFRS, now qualify as SMEs because of the higher ceiling for the size criteria for
SMEs; these entities will transition from the full PFRS to the PFRS for SMEs.
Entities that did not qualify as NPAEs and used other non- PFRS-based financial reporting frameworks
(such as cash or modified cash basis and tax basis) now qualify as SMEs; these entities shall
transition from their previous non-PFRS-based financial reporting frameworks to the PFRS for
SMEs. To address the more important emerging issues on the adoption of the PFRS for SMEs,
especially on the transition to the PFRS for SMEs, the SEC, in a Commission En Banc meeting
on February 4, 2010, adopted some implementation guidelines. Presented in Appendix E is a
copy of the full SEC Implementation Guidelines.
K. WHAT OTHER GUIDANCE IS INCLUDED IN THE PFRS FOR SMES?
The PFRS for SMEs includes some other sections:
a. Glossary of Terms provides the definition of certain terms used in the PFRS for SMEs
b. Derivation Table identifies the primary sources in full PFRS from which the principles in each section
of the PFRS for SMEs were derived
c. Basis for Conclusion provides the discussions and various considerations made in coming out with
the conclusions adopted in the PFRS for SMEs
d. Illustrative Financial Statements includes a complete set of illustrative financial statements
prepared in accordance with the PFRS for SMEs to illustrate major aspects of the standard
e. Presentation and Disclosure Checklist summarizes the presentation and disclosure requirements
throughout the PFRS for SMEs
----------------------------------------------------------------------------------------------------------------------------- ------------Appendix A
Preface to Philippine Financial Reporting Standard for Small and Medium-sized Entities
(PFRS for SMEs)
1. The Financial Reporting Standards Council (FRSC) approved on 13 October 2009, the adoption of
International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs)
issued by the International Accounting Standards Board (IASB), as Philippine Financial Reporting
Standard for Small and Medium-sized Entities (PFRS for SMEs).
Scope of PFRS for SMEs
2. The IASB describes SMEs as entities that (a) do not have public accountability, and (b) do not publish
general purpose financial statements for external users. (See Section 1 of the PFRS for SMEs.)
An entity has public accountability if:
a. its debt or equity instruments are traded in a public market or it is in the process of issuing such
instruments for trading in a public market (a domestic or foreign stock exchange or an
over-the-counter market, including local and regional markets),

b. it holds assets in a fiduciary capacity for a broad group of outsiders as one of its primary
businesses. This is typically the case for banks, credit unions, insurance companies,
securities brokers/dealers, mutual funds and investment banks.
3. The IASB, however, recognizes that many jurisdictions around the world have developed their own
definitions of SMEs for a broad range of purposes including prescribing financial reporting
obligations. Often those national or regional definitions include quantified criteria based on
revenue, assets, employees or other factors.
4. In the Philippines, the PFRS for SMEs shall be used by entities that meet the definition of an SME as
set forth in the Securities and Exchange Commission (SEC) En Banc Resolution dated 13 August
2009. The SEC defines an SME for financial reporting only as an entity:
A. With total assets between P3 Million and P350 Million or total liabilities of between P3 Million
and P250 Million;
B. That is not required to file financial statements under SRC Rule 68.1;
C. That is not in the process of filing its financial statements for the purpose of issuing any class
of instruments in a public market;
D. That is not a holder of a secondary license issued by a regulatory agency, such as a bank (all
types of banks), an investment house, a finance company, an insurance company, a
securities broker/dealer, a mutual fund and a pre-need company; and
E. That is not a public utility.
Effective Date and Transition
5. An entity that meets the definition of an SME in paragraph 4 above shall apply the PFRS for SMEs for
annual periods beginning on or before 1 January 2010.* However, the guidance for applying the
requirements of Section 23, Revenue, in recognizing revenue from agreements for the
construction of real estate set forth in paragraph 23A.14 and 23A.15 shall apply for annual
periods beginning on or after 1 January 2012.
6. The amount of total assets and total liabilities stated in paragraph 4(a) above shall be based on the
audited financial statements as of 31 December 2009.
7. An entity that applies the PFRS for SMEs for the first time (i.e., a first-time adopter of the PFRS for
SMEs) shall apply the transition provisions in Section 35 of the PFRS for SMEs. A first-time adopter of the
PFRS for SMEs is an entity that presents its first annual financial statements that conform to the PFRS for
SMEs, regardless of whether its previous accounting framework was full PFRS or another set of
accounting standards (e.g., the standards set forth in PAS 101, Financial Reporting Standards for Non
Publicly Accountable Entities).
Withdrawal of PAS 101
8. PAS 101 is hereby withdrawn.
----------------------------------------------------------------------------------------------------------------------------- --------------Appendix B
Philippine Accounting Standard (PAS) 101
(Withdrawn in October 2009 when FRSC approved the adoption of the PFRS for SMES -- see
Appendix A)
INTRODUCTION

1. The Accounting Standard Council (ASC), in line with the accounting professions objective to converge
Philippine accounting standards with international accounting standards, issued a number of new
accounting standards, referred to as Philippine Financial Reporting Standards (PFRSs) that
became effective in 2005. The adoption of the new accounting standards was approved by the
Securities and Exchange Commission (SEC), the Board of Accountancy (BOA) and Professional
Regulation Commission (PRC); and the Bangko Sentral ng Pilipinas (BSP). The PFRSs were
intended at that time to be applicable to all reporting entities that prepared financial statements in
conformity with generally accepted accounting principles in the Philippines.
2. Considering the significant number of small and medium-sized entities (SMEs) in the Philippines, the
ASC has considered providing a temporary relief to SMEs in the application of the new standards.
3. The ASC plan was given impetus by the decision of the International Accounting Standards Board
(IASB) in 2005 to undertake a project to develop accounting standards suitable for entities that (1)
do not have public accountability and (2) publish general purpose financial statements for
external users (e.g., owners who are not involved in managing the business, existing and
potential creditors, and credit rating agencies). The IASB refers to this group of entities as NonPublicly Accountable Entities, or NPAEs. The IASB has decided to use the term non-publicly
accountable entities, rather than small and medium-sized entities because the latter term has
different meanings around the world.
4. Under the IASB project, an entity has public accountability if:
it has filed, or it is in the process of filing, its financial statements with a securities commission or
other regulatory organization for the purpose of issuing any class of instruments in a
public market;
it holds assets in a fiduciary capacity for a broad group of outsiders, such as a bank, insurance
company, securities broker/dealer, pension fund, mutual fund or investment banking
entity;
It is a public utility or similar entity that provides an essential public service; or
It is economically significant in its home country on the basis of criteria such as total assets,
total income, number of employees, degree of market dominance, and nature and extent
of external borrowings.
5. The IASB expects to issue an exposure draft on accounting by NPAEs in March 2006 and the final
standard in 2007.
Objective
6. The objective of this Standard is to provide temporary relief in the application of the new PFRSs that
became effective in 2005 to entities that are covered by this Standard. The Standard identifies
which entities are covered, provides an option to these entities in the application of the new
PFRSs, and specifies the financial reporting standards applicable to these entities.
7. This Standard shall be applied in the general purpose financial statements prepared and presented by
an entity with no public accountability. An entity has public accountability:
A. if it is required to file financial statements under SEC Rule 68.1, Special Rule on Financial
Statements of Reporting Companies under Section 17.2 of the Securities Regulation
Code. Under the SEC rules, these would include:
1. An issuer which has sold a class of their securities pursuant to a registration
under Section 12 of the Code;
2. An issuer with a class of securities listed for trading on an Exchange; and

3. An issuer with assets of at least P50 million and having 200 or more holders
each holding at least 100 shares of a class of its equity securities as of
the first day of the issuers fiscal year;
B. If it is in the process of filing its financial statements for the purpose of issuing any class of
instruments in a public market;
C. If it holds assets in a fiduciary capacity for a broad group of outsiders, such as a bank (all
types of banks), an investment house, a finance company, an insurance company, a
securities broker/dealer, a mutual fund and a pre-need company;
D. If it is a public utility or similar entity that provides an essential public service;
E. If it is economically significant, as described in paragraph 8; or
F. If it is considered by its primary regulator to have public accountability.
8. For purposes of paragraph 7(e), an entity is considered economically significant if it exceeds either of
the following: total assets of P250 million or total liabilities of P150 million. The total assets and
total liabilities are based on the entitys annual financial statements and on consolidated totals, if
the entity presents consolidated financial statements.
9. The criteria for an economically significant entity are arbitrary and will be reviewed when the IASB has
issued its final standard on NPAEs or earlier if necessary.
10. For purposes of this Standard, an entity that is a subsidiary of a parent that is considered to have
public accountability under paragraph 7 is similarly considered to have public accountability.
Option Available to Qualifying Entities
11. A qualifying entity under this Standard is allowed not to apply in its general purpose financial
statements the new PFRSs that became effective in 2005.
12. A qualifying entity, however, may still choose to apply any or all of the new PFRSs.
13. An entity that has public accountability, as provided in paragraphs 7 and 10, is required to apply the
new PFRSs in its financial statements for 2005, unless its primary regulator issues a
pronouncement exempting the entity from applying a new standard or certain provisions of a new
standard.
Financial Reporting Standards Applicable to Qualifying Entities
14. A qualifying entity under this Standard that chooses to avail of the option not to apply the new PFRSs
shall apply the applicable financial reporting standards effective as of December 2004 in preparing its
general purpose financial statements. The Appendix lists these standards.
Disclosure
15. A qualifying entity shall disclose the basis of preparation of its financial statements and the specific
accounting policies used.(The effectivity of PAS 101 was extended from 2007; it was withdrawn only in October
2009 when the PFRS for SMEs was adopted by the FRSC.)

Effective Date
16. A qualifying entity shall apply this Standard for annual periods beginning on or after January 1, 2005.
The Standard shall be effective for 2005 to 2007, unless revoked earlier.

----------------------------------------------------------------------------------------------------------------------------- --------------APPENDIX C

Snapshot of the PFRS for SMEs

Section No.

Title

Description

Small and Medium-sized Entities (SMEs)

Defined as entities that

(a) do not have public accountability, and
(b) publish general purpose financial statements for
external users.

Concepts and Pervasive Principles

Major concepts and basic principles underlying the

financial statements of SMEs, such as definitions of
assets, liabilities, income and expenses.

Financial Statement Presentation

A complete set of financial statement comprises:

a. a statement of financial position;
b. either a single statement of comprehensive
income,
or separate income statement and a separate
statement of comprehensive income;
c. a statement of changes in equity;
d. a statement of cash flows; and
e. notes, comprising a summary of significant
accounting policies, other explanatory information,
and comparatives.

Statement of Financial Position

A Statement of Financial Position consists of certain

minimum line items. These items are classified as
either current or non-current unless a presentation
based on the liquidity of the items provides
information that is more reliable and relevant.

Statement of Comprehensive
Income and Income Statement

Total comprehensive income is presented in either a

single statement of comprehensive income or in two
statements (an income statement and a statement of
comprehensive income).

Statement of Changes in Equity

and Statement of Income and
Retained Earnings

Changes in an entitys equity for periods are

presented either in a statement of changes in equity
or, if certain conditions are met and an entity
chooses, in a statement of income and retained
earnings. A statement of income and retained
earnings can be used where the only changes to the
entitys equity during the period arise from profit or
loss, payment of dividends, corrections of prior period
errors, and changes in accounting policy.

Statement of Cash Flows

Changes in cash and cash equivalents are reported,

showing separately changes from operating activities,

investing activities and financing activities.

Notes to the Financial Statements

Significant accounting policies are disclosed, together

with details of judgments made and key sources of
estimation uncertainty.

Consolidated and Separate

Financial Statements

A parent entity is required to present consolidated

financial statements in which all its subsidiaries are
included. There are some limited exceptions to this
rule.

10

Accounting Policies, Estimates

and Errors

Prior period errors are accounted for on a

retrospective basis. Changes in accounting estimates
are recognized prospectively. Changes in accounting
policy are accounted for on a retrospective basis
unless specific transitional provisions apply.

11

Basic Financial Instruments

An amortized cost or cost less impairment model is

used for basic financial instruments such as cash,
loans and trade receivables and payables.

12

Other Financial Instruments

Issues

Other financial instruments are generally measured at

fair value through profit or loss. Examples of such
instruments include asset backed securities, options,
futures contracts, forward contracts, and interest rate
swaps. Hedge accounting is permitted only for certain
specific types of risk. Certain conditions must be met
in order to use hedge accounting.

13

Inventories

Inventories are measured at the lower of cost and net

realizable value.

14

Investments in Associates

Investments in associates are measured using any of

the following:
The cost model (cost less accumulated impairment);
The equity model (initial recognition at cost, with
subsequent adjustments to reflect the investors
share of the profit or loss and other comprehensive
income of the associate); or
The fair value model (compulsory where a published
price exists for the investment).

15

Investments in Joint Ventures

An accounting policy election similar to that for

associates applies to investments in joint ventures.
Proportionate consolidation is not permitted.

16

Investment Property

Investment property with fair value that can be

measured reliably without undue cost or effort is
accounted for at fair value through profit or loss.
Otherwise investment property is accounted for at
cost less depreciation andimpairment.

17

Property, Plant and Equipment

Property, plant and equipment are measured at cost

less depreciation and impairment.

18

Intangible Assets other than

Goodwill

All internally developed intangibles, including all

research and development activities, are expensed
as incurred. Acquired intangibles meeting the criteria
for recognition are capitalized as assets and
measured at cost less amortization and impairment.
All intangible assets are considered to have a finite
useful life. Revaluation of intangible assets is not
permitted.

19

Business Combinations and

Goodwill

Goodwill is measured at cost less amortization and

impairment. Where an entity is unable to make a
reliable estimate of the useful life of goodwill, its life is
presumed to be ten years and amortized over that
period.

20

Leases

Finance leases are recognized as an asset by the

lessee. Lease payments under operating leases are
recognized by the lessee as an expense.
Classification of leases depends on the substance of
the transaction rather than the form of the contract.

21

Provisions and Contingencies

Present obligations are recognized as provisions

when there is a probable outflow of economic benefits
and the amount of the obligation can be estimated
reliably. Contingent liabilities and contingent assets
are not recognized but are disclosed in the notes.

22

Liabilities and Equity

Equity is the residual interest in the assets of an entity

after deducting all its liabilities. A financial liability is a
present obligation of the entity arising from past
events, which is expected to result in an outflow of
economic benefits. Split accounting must be applied
to compound financial instruments (such as
convertible debt), which contain both a liability and an
equity component.

23

Revenue

For the sale of goods, revenue is recognized on

transfer of the significant risks and rewards of
ownership. In most cases, this will coincide with the
transfer of legal title or the passing of possession to
the buyer. For services and construction contracts,
revenue is recognized according to the stage of
completion at the end of the reporting period. Interest
and royalties receivable are recognized on an accrual
basis. Dividends are recognized when the right to
receive the payment is established.

24

Government Grants

Government grants are recognized in income when

any specified performance conditions have been met.
Where there are no such conditions, the grant is
recognized in income upon receipt.

25

Borrowing Costs

All borrowing costs are expensed as incurred.

26

Share-based

Payment Employee share awards and share options

are recognized as an expense in profit or loss over
the vesting period. A corresponding credit is
recognized in equity. These amounts are measured
at the fair value of the instruments provided.

27

Impairment of Assets

An impairment loss is recognized when the carrying

amount of an asset exceeds its recoverable amount.

28

Employee Benefits

Contributions payable under defined contribution

plans are recognized as expenses in the period in
which they are due. For defined benefit pension
plans, an entity recognizes a liability for its obligations
net of the plans assets. The net change in the liability
during the period is recognized as the cost of the plan
during the period. Entities can choose to recognize all
actuarial gains and losses in either profit or loss or in
other comprehensive income.

29

Income Tax

Deferred tax is calculated using a temporary

difference approach based on the difference between
the carrying amount of an asset and its tax base.

30

Foreign currency Translation

Foreign currency transactions are translated into the

functional currency of the reporting entity. All
monetary items and those non-monetary items that
are measured at fair value are subsequently
retranslated at the end of each reporting period.

31

Hyperinflation

Entities subject to hyperinflation are required to state

all amounts at the prices that are current at the end of
the reporting period.

32

Events after the End of the

Reporting Period

Adjustment is made for events that provide evidence

of conditions that existed at the end of the reporting
period. No adjustment is made for events that are
indicative of conditions that arose after the end of the
reporting period, although they are disclosed.

33

Related Party Disclosures

Disclosures draw attention to the existence of related

parties and transactions and balances with such
parties.

34

Specialized Activities

Guidance is provided for three types of specialized

activities agriculture, extractive activities and
service concessions.

35

Transition to the IFRS for SMEs

Mandatory exceptions to and optional exemptions

from the full requirements of the IFRS for SMEs
enable the Standard to be applied more easily by
entities adopting it for the first time.

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