Accounting for SME

8/10/2019 Accounting for SME

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ACCOUNTING FOR SME

A. INTRODUCTION

The Philippine Financial Reporting Standard for Small and Medium-sized Entities (PFRS forSMEs) was approved by the Financial Reporting Standards Council (FRSC) in October 2009 forimplementation in the Philippines. The standard was adopted by the FRSC from the InternationalFinancial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs) published by theInternational Accounting Standards Board (IASB) in July 2009. The Preface to PFRS for SMEs issued bythe FRSC adopting the standard in the Philippines is presented in Appendix A. The IASB issued the IFRSfor 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 companiesprepare financial statements but, in much of the world, these statements are based on local requirementsthat differ from the full IFRS.

The IASBs full IFRS were designed to meet the needs of equity investors and other users offinancial statements in public capital markets and, therefore, cover a wide range of issues, as well as asizeable 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 onassessing shorter-term cash flows, liquidity and solvency. In addition, many SMEs have observed that fullIFRS impose a burden on them, and that this burden has grown as IFRS have become more detailed andmore countries have begun to use them. The IASB has, therefore, developed the IFRS for SMEs with thetwin 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 ofthe users of financial statements of privately held companies, as well as the burden to preparers of thosefinancial statements, the then Accounting Standards Council (ASC, now the FRSC) provided temporaryrelief to private companies referred to as non-publicly accountable entities (or NPAEs) in October2005 by permitting entities that qualified as NPAEs not to use the full PFRS. The temporary relief wasgiven under Philippine Accounting Standards (PAS) 101, Financial Reporting Standards for Non-publiclyAccountable Entities.A copy of PAS 101 is presented in Appendix B.

PAS 101 previously permitted NPAEs to apply the applicable financial reporting standardseffective as of December 31, 2004, i.e., NPAEs were given the option to apply or not to apply any newFRSC pronouncements that became effective after December 31, 2004.

Upon the adoption of the PFRS for SMEs, PAS 101 was withdrawn; hence it is no longerapplicable in the Philippines.

This Accounting Alert aims to provide concerned entities with some guidance in using the PFRSfor SMEs, mainly by providing discussions on the differences between the PFRS for SMEs and the fullPFRS on one hand, and between the PFRS for SMEs and PAS 101 on the other hand, as well as someissues 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 asto which entities are required or permitted to use the PFRS for SMEs will rest with legislative andregulatory 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 sizedentities in Section C). This definition is essential sothat (a) the IASB can decide on the accounting and disclosure requirements that are appropriate for thatclass of entity, and (b) the legislative and regulatory authorities, standard-setters, reporting entities andtheir auditors will be informed of the intended scope of applicability of the standard.


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The Philippine Securities and Exchange Commission (SEC), in a notice to the public issued onDecember 11, 2009 (see Appendix C), announced that the Commission En Banc in its meeting onDecember 3, 2009 resolved to adopt the PFRS for SMEs as part of its rules and regulations. The SECNotice also included a definition of small and medium sized entities that includes size criteria (seeSection C).

In the abovementioned notice of December 11, 2009, the SEC required entities that meet thedefinition of SMEs to apply the PFRS for SMEs as of the effective date (which was set for annual periodsbeginning January 1, 2010 see Section D). This requirement has been clarified by the SEC to meanthat entities qualifying as SMEs shall use the PFRS for SMEs; such entities are not allowed to use otherfinancial reporting frameworks, such as the full PFRS, for their general purpose financial statements. Thisrequirement is somewhat restrictive, but for the SEC, this fulfills the goal to allow comparability of financialstatements of SMEs.

The SEC, however, provided exemptions from the mandatory adoption of PFRS for SMEs toSMEs that meet certain criteria. The SEC notice to the public issued on October 11, 2010 (see AppendixF) 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 underfull PFRS;

An SME is a subsidiary or branch office of a foreign subsidiary that will be moving towards IFRSpursuant to the foreign countrys published convergence plan;

An SMEs short-term projections show that it will breach the quantitative thresholds set in the criteria forSME, and the breach is expected to be significant and continuing due to its long-term effect onthe entitys total assets or liabilities;

An SME has concrete plans to conduct an ini tial 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, andb. 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 classof instruments in a public market; or

b. it holds assets in a fiduciary capacity for a broad group of outsiders as one of itsprimary businesses. This is typically the case for banks, credit unions, insurancecompanies, securities brokers/dealers, mutual funds and investment banks.Entities holding assets in a fiduciary capacity for reasons incidental to a primarybusiness 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 enterprisesrequiring a nominal membership deposit and sellers that receive payment inadvance 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 includeany size criteria. However, the Philippine SEC, in its notice of December 11, 2009 cited earlier, adoptedthe Following definition of small andmedium-sized entities that includessize criteria:


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1. The entity has total assets of between P3 million and P350 million or total liabilities of betweenP3 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, asecurities 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 thedefinition of NPAEs adopted by the then Accounting Standards Council (now theFRSC) under PAS 101, with the exception of the amounts set for the size criteria. Forthe definition of SMEs, the size criteria set by the SEC include a floor (P3 million forboth total assets and total liabilities) and a ceiling (P350 million for total assetsand P250 million for total liabilities). For the definition of NPAEs, the size criteria werepegged at a single amount for total assets (P250 million) and total liabilities (P150million); 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 thePhilippines 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 SMEsin 2009 as long as the SMEs are capable, in terms of systems and resources, to efficiently transition toPFRS 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 completeset 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 ofnon-cash transactions, any deferrals or accruals of past or future operating cash receiptsor payments, and items of income or expenses associated with investing or financingcash flows) or the direct method (i.e., major classes of gross cash receipts and grosscash 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 periodfor all amounts presented.

As a simplification in comparison to full PFRS, where the only changes to equity during theperiods 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 singlestatement of income and retained earnings in place of a separate statement of comprehensive incomeand a statement of changes in equity.


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F. WHAT ARE THE GENERAL RECOGNITION AND MEASUREMENT PRINCIPLES UNDER PFRSFOR SMES?

The PFRS for SMEs has been designed essentially to work as a stand-alone document, with nomandatory cross references to full PFRS. Where full PFRS permits a number of possible accountingoptions for a particular transaction, the standard presents SMEs with a simplified version of the fullrequirements 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 FRSCsFramework 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 atransaction or other event or condition, the standard requires that management applies judgment indeveloping 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 toand 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, incomeand 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 thefull 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. Principalamong these are using simplified drafting in writing the standard, making the final document easier tounderstand and follow, and reducing the number of disclosures to be made when preparing the financialstatements.

The IASB has indicated that future revisions to the IFRS for SMEs (from which the PFRS forSMEs 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 toundertake a thorough review of the SMEs experience in applying the IFRS for SMEs when two years offinancial statements using the standard have been published by a broad range of entities. The IASBexpects that it will then propose amendments to address then implementation issues identified in thatreview. It will also address issues arising from new and amended IFRS that are published in theintervening period.

Any such amendments made by the IASB are expected to be adopted by the FRSC forimplementation 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 3,000 potentialdisclosures

Around 300 potentialdisclosures

Around 2,800 pages inlength

Less than 230 pages

Updated several timesa year

Anticipated to beupdated on a threeyearly basis


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A snapshot of the PFRS for SMEs containing the section no., title and description of the varioussections 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 consideredrelevant to the needs of small and medium-sized entities. Topics omitted from the PFRS for SMEs are:

Segment reporting Interim reporting Earnings per share InsuranceAssets 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 thePFRS 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 potentialdifferences 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 withbasic financial instruments and the other with more complex financial instruments and transactions.

Examples of financial instruments that are normally considered basic financialinstruments (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 heldAccounts, 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 financialinstruments and transactions (covered under Section 12) include:

Asset-backed securities, such as collateralized mortgage obligations, repurchaseagreements and securitized packages of receivables

Options, rights, warrants, futures contracts, forward contracts and interest rate swaps that canbe 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


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B. the recognition and measurement provisions of PAS 39, Financial Instruments: Recognition andMeasurement.

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 ofthe 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; orb. 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 thatare 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 lossb. 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 IAS39 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 financialassets and principle based approach to their classification.

Under this new requirement, this will take effect when the other phases of the project arecompleted and become effective, entities are required to classify a financial asset at either amortized costor fair value on the basis of the entitys business model for managing the financial asset, and thecontractual 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 fortreatment as basic financial instruments are subsequently measured at fair value at the end of eachreporting period, with changes in their fair value being recognized in profit or loss. (The equivalents ofPAS 39s classifications on available-for-sale financial assets and held-to-maturity investments are notincluded in the PFRS for SMEs.)

Section 12 of PFRS for SMEs also sets out the conditions that must be met for hedge accountingto be used and how it is to be applied. Compared with PAS 39, the guidance contained in PFRS for SMEsis a simplified version but is more restrictive as it permits hedge accounting only for certain specified risksand 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 inassociates. This applies to the accounting in consolidated financial statements and in the financialstatements 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 forall such investments under either:

The cost model (cost less any accumulated impairments losses);


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The equity model (initial recognition at the transaction price, with subsequent adjustments to reflect theinvestors 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 whichthere 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) appliesto investments in jointly controlled entities (JCEs). The PFRS for SMEs does not permit the use ofproportionate consolidation.

Under the full PFRS, PAS 31, Interests in Joint Ventures, a venture shall recognize its interest ina JCE using proportionate consolidation or, as an alternative, the equity method. (As additionalinformation, there is a proposed amendment to PAS 31 to eliminate the proportionate consolidationmethod 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 reliablywithout undue cost or effort on an ongoing basis is accounted for at fair value, with changes in fair valuebeing accounted for through profit or loss. (It is not possible to elect to use the cost-depreciationimpairment model for such property.)

All other investment properties are accounted for as property, plant and equipment using the costdepreciation- impairment model.

Under PAS 40, Investment Property, with certain exceptions, an entity shall measure itsinvestment property using either the fair value model or the cost model. The accounting policy chosenshall 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 costdepreciation- impairment model.

There is no option to use a revaluation model.

On the other hand, full PFRS under PAS 16, Property, Plant and Equipment, allowsmeasurement of property, plant and equipment using either the cost model or the revaluation model. Theaccounting 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 fromdevelopment (or from the development phase of an internal project) when certain conditions are compliedwith. The PFRS for SMEs, on the other hand, requires an entity to recognize an expenditure incurredinternally 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 therecognition criteria under the PFRS for SMEs.


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The criteria for recognition as assets are always considered satisfied for intangible assets that areseparately acquired. Intangibles acquired in a business combination are normally recognized as assetson 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, thePFRS for SMEs requires intangible assets to be measured at cost less accumulated amortization andaccumulated impairment losses. For the purpose of the PFRS for SMEs, all intangible assets areconsidered to have a finite useful life. Where an entity is unable to make a reliable estimate of the usefullife 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 revaluationmodel in valuing intangible assets. Intangible assets with finite useful lives are amortized over their usefullives; 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 costof a business combination at the acquisition date, by recognizing the acquirees identifiable assets andliabilities and a provision for those contingent liabilities that satisfy the recognition criteria under the PFRSfor SMEs at their fair values at that date.

Any excess of the cost of the business combination over the acquirers interest in the net fairvalue of the identifiable assets, liabilities and provisions for contingent liabilities so recognized shall beaccounted for as goodwill (positive); any excess of the acquirers interest in the net fair va lue of theidentifiable assets, liabilities and provisions for contingent liabilities over cost shall be accounted for asthe so-called negative goodwill. Where a negative goodwill is identified, the identification andmeasurement of the acquirees assets, liabilities and contingent liabilities and the measurement of thecost of the combination is first of all reassessed. After this reassessment, any remaining negative goodwillis recognized immediately in profit or loss.

After initial recognition, the acquirer shall measure goodwill acquired in a business combination atcost less accumulated amortization and accumulated impairment losses. Where an entity is unable tomake 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 inthe full PFRS under PFRS 3, Business Combinations.

However, under PAS 38, Intangible Assets, intangible assets with indefinite useful lives are notamortized; therefore, goodwill, being considered as having indefinite useful life, is not amortized under thefull PFRS. Additionally, PAS 36, Impairment of Assets, requires annual testing of goodwill acquired inbusiness combination for impairment, irrespective of whether there is any indication of impairment. Therequirement under the PFRS for SMEs to amortize goodwill is an important simplification compared to therequirements 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 anindicator of impairment.

Impairment of goodwill (Section 27)

In testing for impairment of goodwill (in cases where there is an indicator of impairment), thePFRS for SMEs requires that where goodwill cannot be allocated to individual cash generating units (orgroups of cash-generating units) on a non-arbitrary basis, then for the purpose of testing goodwill, areporting 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 beenintegrated (integrated means the acquired business has been restructured or dissolved intothe reporting entity or other subsidiaries), or


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

This treatment allows goodwill to be allocated and tested for impairment at a higher level thanthat required by full PFRS under PAS 36 where goodwill is allocated to the lowest level within the entity atwhich 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 orloss 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 coststhat are directly attributable to the acquisition, construction or production of a qualifying asset as part ofthe cost of that asset. Other borrowing costs are recognized as expense in the period when incurred. Aqualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intendeduse or sale.

Share-based payment (Section 26)

The requirements for the recognition and measurement of share-based payment under the PFRSfor 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 ofshare options and other forms of share based payment with the followingthree-tier measurement hierarchy:

a. If an observable market price is available for the equity instruments granted, that price shall beused.

b. If an observable market price is not available, the fair value of share options granted shall bemeasured using entity specific observable market data such as for a recent transaction in theshare 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 optionsusing an option pricing model. The inputs for the model should use market data to thegreatest 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, fordefined benefit plans the determination of the defined benefit liability (or asset) and related cost of thedefined benefit plan is much simpler than that in the full PFRS under PAS 19, Employee Benefits. AnSMEs cost of itsdefined benefit plans for the period is simply computed as the net change in its definedbenefit liability during the period (the latter being determined as the present value of the obligationsminus the present value of plan assets at the reporting date).

Allocation of actuarial gains and lossesThe 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, orB. 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 thatcan be recognized in profit or loss (referred to as the corridor approach).


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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 isthe method required by PAS 19) to measure its defined benefit obligation and the related expense, it shalldo so.

However, where an entity is unable to do so without undue cost or effort, it is permitted to makethe 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 afterservice (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. Ifthe principal actuarial assumptions have not changed significantly during the periods between actuarialvaluations, the defined benefit obligation can be measured by adjusting the prior period measurement forchanges 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 amountthat includes the effect of possible outcomes of a review by the tax authorities since the uncertainty aboutwhether the tax authorities will accept the amounts reported to them by the entity affects the amount ofthe 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 thetax authorities shall be disclosed.

The full PFRS at present does not include the above-mentioned requirements (sometimesreferred to as uncertain tax positions).

However, there is another standard (PAS 37, Provisions, Contingent Liabilities and ContingentAssets) that applies as well to income tax matters that may result in the recognition or disclosure ofcontingencies relating to taxes.

SUMMARY OF MAIN AREAS OF DIFFERENCES IN RECOGNITION AND MEASUREMENTGUIDANCE

The following table summarizes some of the main simplifications made in the PFRS for SMEs, aswell 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 financialinstruments

Other financialinstruments issues

There are four categories offinancial instruments.

Hedge accounting is only possible

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

Rules on the use of hedge


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Where strict documentation andeffectiveness requirements are met.

accounting 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 for

SMEs and not under PFRS 7).

Investments in associates(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 equity method; 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 investmentsat:

(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- impairmentmodel; or(b) fair value model

Must be accounted for at fair valueif such a value is available withoutundue cost or effort. Cost modelshould be used only when fair value

is 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 costdepreciation- 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 all researchand development costs, areexpensed. Requires subsequent measurementof capitalized intangible assets(such as those separately acquired)at cost less accumulatedamortization and impairment losses No revaluation option for capitalized


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intangible assetsAll 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 for internalmanagement purposes.

Goodwill is amortized (presumedlife of ten years is used wherereliable estimate of useful life cannotbe made). 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 areexpensed when 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 that incorporatesall relevant factors and assumptions.Detailed guidance on many valuationissues is provided.

A simplified guidance (i.e., a three-tier measurement hierarchy) formeasuring the fair value of shareoptions and other form of sharebased 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 the definedbenefit 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.


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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 applicablefinancial reporting standards effective as of December 31, 2004, i.e., NPAEs were given the option toapply 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 anynew pronouncements made effective after December 31, 2004;

Other NPAEs adopted the pronouncements effective as of December 31, 2004 and applied some newstandards made effective after December 31, 2004; while

Some other NPAEs applied the full PFRS. Those NPAEs that now qualify as SMEs under the PFRS forSMEs are required to apply the PFRS for SMEs, except for those entities exempted by the SECfrom the mandatory adoption of the PFRS for SMEs (see discussion in Section B and AppendixF).

For the guidance of NPAEs that previously used PAS 101, we present below some of the majordifferences between PAS 101 and the PFRS for SMEs. (For NPAEs that previously used the full PFRSand 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) werepegged at a single amount for total assets (P250 million) and total liabilities (P150 million); therewas no ceiling or floor similar to that provided for SMEs (as the term is defined and used underthe PFRS for SMEs). The size criteria for SMEs include a floor (P3 million for both total assetsand 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 applyaccounting standards effective as of December 31, 2004 and to apply or not to apply any new FRSCpronouncements that became effective after December 31, 2004, or to apply the full PFRS. QualifyingSMEs, on the other hand, are required to apply the PFRS for SMEs, save for those entities that areexempted 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 ofcomprehensive income.

SMEs financial statements shall include either a single statement of comprehensive income or twostatements, i.e., a separate statement of income and a separate statement of comprehensive income.

Valuation of inventoriesThe last-in, first-out (LIFO) method was allowed as an alternative valuation forinventories of NPAEs. The PFRS for SMEs does not include the LIFO method as an alternative inventoryvaluation 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 PFRSfor SMEs. Financial assets of NPAEs were categorized as either marketable securities (current) that weremeasured at the lower of cost or market with the unrealized losses recognized in profit or loss; ormarketable securities (noncurrent) that were measured at the lower of cost or market with the unrealizedlosses taken into the equity section of the balance sheet and other long-term investments that wereaccounted for under the equity method or the cost method. Disclosures required were minimum and notdetailed. SMEs, on the other hand, have the option to follow PAS 39, or the relevant provisions under thePFRS for SMEs (which are also based on PAS 39). Those requirements, while simplified for SMEs, aredefinitely more complex and detailed than those allowed the NPAEs under PAS 101.


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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 ofborrowing costs is not allowed.

Income taxesThere is no requirement for NPAEs to consider (and disclose) the effect of uncertain taxpositions (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 thatincludes the possible effect of uncertain tax positions and to make the related disclosures in the financialstatements.

Plant, property and equipment NPAEs were allowed to revalue plant, property and equipment (as analternative to using the cost method). They were not required to de-componentize the fixed assets whencomputing depreciation. (Decomponentization refers to the process wherein major components of a fixedasset are identified, cost is allocated to such components, and the components are depreciated over theirspecific useful lives.)

The PFRS for SMEs eliminates the revaluation method as an alternativemmeasurement of property, plantand equipment of SMEs. It requires decomponentization for purposes of depreciation computation.

Goodwill and other intangible assetsFor NPAEs, goodwill arising from business combinations (as wellas other intangible assets) was allowed to be amortized over a period of 20 years unless the use of auseful 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 financialstatements 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 presentedunder the equity section of the statements of financial position.

Investments in associates Investments in associates were required to be accounted for under theequity 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 theproportionate consolidation method or the equity method. The PFRS for SMEs does not allowproportionate consolidation in accounting for interests in joint ventures. Options allowed are the same asin 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. agricultureb. extractive activitiesc. service concession arrangements

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

The pronouncements effective as of December 31, 2004 applied by most NPAEs did not includestandards that deal with the above specialized activities.


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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 offinancial position as of its date of transition (being the beginning of the earliest period for which the entitypresents 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 ofequity 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 preparedin accordance with the PFRS for SMEs may differ from those that it used for the same date using itsprevious financial reporting framework. The transition to the PFRS for SMEs, therefore, will result inadjustments that arise from transactions, other events or conditions that occurred before the date oftransition to the PFRS for SMEs; such adjustments are recognized directly in retained earnings (or, ifappropriate, 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 applyonly to a first-time adopter of the PFRS for SMEs. (An entity is a first-time adopter where it prepares itsannual financial statements in accordance with the PFRS for SMEs for the first time, regardless ofwhether 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 financialreporting 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 financialstatements that conform to the PFRS for SMEs. These exemptions are similar to those contained inPFRS 1, Firsttime Adoption of Philippine Financial Reporting Standards. Disclosure on first-time adoptionIn order to explain the process of transition, the PFRS for SMEs contains requirements for a firsttimeadopter to disclose a number of reconciliations to its most recent financial statements prepared under itsprevious financial reporting framework.

If it is impracticable for an entity to restate the opening statement of financial position at the dateof 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 ispracticable to do so, and shall identify the data presented for prior periods that are not comparable withthe 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 followingcategories:


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Entities that previously qualified as NPAEs and used PAS 101 now qualify as SMEs; these entities willtransition from PAS 101 to the PFRS for SMEs.

Entities that previously qualified as NPAEs and used PAS 101 now do not qualify as SMEs becausethey crossed the ceiling for the size criteria for SMEs; these entities will transition from PAS 101to the full PFRS.

Entities that previously qualified as NPAEs but opted to use full PFRS now qualify as SMEs; theseentities (with the exception of entities that are exempted by the SEC from the mandatory adoptionof 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 forSMEs; 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 shalltransition from their previous non-PFRS-based financial reporting frameworks to the PFRS forSMEs. 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 meetingon February 4, 2010, adopted some implementation guidelines. Presented in Appendix E is acopy 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 Termsprovides the definition of certain terms used in the PFRS for SMEsb. Derivation Tableidentifies the primary sources in full PFRS from which the principles in each section

of the PFRS for SMEs were derivedc. Basis for Conclusionprovides the discussions and various considerations made in coming out with

the conclusions adopted in the PFRS for SMEsd. 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 standarde. Presentation and Disclosure Checklist summarizes the presentation and disclosure requirements

throughout the PFRS for SMEs

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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 ofInternational Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs)issued by the International Accounting Standards Board (IASB), as Philippine Financial ReportingStandard 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 publishgeneral 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 suchinstruments for trading in a public market (a domestic or foreign stock exchange or anover-the-counter market, including local and regional markets),


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b. it holds assets in a fiduciary capacity for a broad group of outsiders as one of its primarybusinesses. 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 owndefinitions of SMEs for a broad range of purposes including prescribing financial reportingobligations. Often those national or regional definitions include quantified criteria based onrevenue, 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 asset forth in the Securities and Exchange Commission (SEC) En Banc Resolution dated 13 August2009. 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 Millionand 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; andE. 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 forannual periods beginning on or before 1 January 2010. * However, the guidance for applying therequirements of Section 23, Revenue, in recognizing revenue from agreements for theconstruction of real estate set forth in paragraph 23A.14 and 23A.15 shall apply for annualperiods 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 theaudited 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 forSMEs) shall apply the transition provisions in Section 35 of the PFRS for SMEs. A first-time adopter of thePFRS for SMEs is an entity that presents its first annual financial statements that conform to the PFRS forSMEs, regardless of whether its previous accounting framework was full PFRS or another set ofaccounting standards (e.g., the standards set forth in PAS 101, Financial Reporting Standards for NonPublicly Accountable Entities).

Withdrawal of PAS 101

8. PAS 101 is hereby withdrawn.

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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


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1. The Accounting Standard Council (ASC), in line with the accounting professions objective to convergePhilippine accounting standards with international accounting standards, issued a number of newaccounting standards, referred to as Philippine Financial Reporting Standards (PFRSs) thatbecame effective in 2005. The adoption of the new accounting standards was approved by theSecurities and Exchange Commission (SEC), the Board of Accountancy (BOA) and ProfessionalRegulation Commission (PRC); and the Bangko Sentral ng Pilipinas (BSP). The PFRSs wereintended at that time to be applicable to all reporting entities that prepared financial statements inconformity with generally accepted accounting principles in the Philippines.

2. Considering the significant number of small and medium-sized entities (SMEs) in the Philippines, theASC has considered providing a temporary relief to SMEs in the applicat ion 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 forexternal users (e.g., owners who are not involved in managing the business, existing andpotential creditors, and credit rating agencies). The IASB refers to this group of entities as Non-

Publicly Accountable Entities, or NPAEs. The IASB has decided to use the term non-publiclyaccountable entities, rather than small and medium -sized entities because the latter term hasdifferent 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 orother regulatory organization for the purpose of issuing any class of instruments in apublic market;

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

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 extentof external borrowings.

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

Objective

6. The objective of this Standard is to provide temporary relief in the application of the new PFRSs thatbecame effective in 2005 to entities that are covered by this Standard. The Standard identifieswhich entities are covered, provides an option to these entities in the application of the newPFRSs, 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 byan 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 FinancialStatements of Reporting Companies under Section 17.2 of the Securities RegulationCode. Under the SEC rules, these would include:

1. An issuer which has sold a class of their securities pursuant to a registrationunder Section 12 of the Code;

2. An issuer with a class of securities listed for trading on an Exchange; and


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3. An issuer with assets of at least P50 million and having 200 or more holderseach holding at least 100 shares of a class of its equity securities as ofthe 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 ofinstruments in a public market;

C. If it holds assets in a fiduciary capacity for a broad group of outsiders, such as a bank (alltypes of banks), an investment house, a finance company, an insurance company, asecurities 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 ofthe following: total assets of P250 million or total liabilities of P150 million. The total assets andtotal liabilities are based on the entitysannual 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 hasissued 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 havepublic 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 financialstatements 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 thenew PFRSs in its financial statements for 2005, unless its primary regulator issues apronouncement exempting the entity from applying a new standard or certain provisions of a newstandard.

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 PFRSsshall apply the applicable financial reporting standards effective as of December 2004 in preparing itsgeneral 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 specificaccounting policies used.(The effectivity of PAS 101 was extended from 2007; it was withdrawn only in October2009 when the PFRS for SMEs was adopted by theFRSC.)

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.


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APPENDIX C

Snapshot of the PFRS for SMEs

Section No. Title Description

1 Small and Medium-sized Entities (SMEs) Defined as entities that(a) do not have public accountability, and(b) publish general purpose financial statements forexternal users.

2 Concepts and Pervasive Principles Major concepts and basic principles underlying thefinancial statements of SMEs, such as definitions ofassets, liabilities, income and expenses.

3 Financial Statement Presentation A complete set of financial statement comprises:a. a statement of financial position;b. either a single statement of comprehensiveincome,or separate income statement and a separatestatement of comprehensive income;c. a statement of changes in equity;d. a statement of cash flows; ande. notes, comprising a summary of significantaccounting policies, other explanatory information,and comparatives.

4 Statement of Financial Position A Statement of Financial Position consists of certain

minimum line items. These items are classified aseither current or non-current unless a presentationbased on the liquidity of the items providesinformation that is more reliable and relevant.

5 Statement of ComprehensiveIncome and Income Statement

Total comprehensive income is presented in either asingle statement of comprehensive income or in twostatements (an income statement and a statement ofcomprehensive income).

6 Statement of Changes in Equityand Statement of Income andRetained Earnings

Changes in an entitys equity for periods arepresented either in a statement of changes in equityor, if certain conditions are met and an entitychooses, in a statement of income and retainedearnings. A statement of income and retainedearnings can be used where the only changes to theentitys equity during theperiod arise from profit orloss, payment of dividends, corrections of prior perioderrors, and changes in accounting policy.

7 Statement of Cash Flows Changes in cash and cash equivalents are reported,showing separately changes from operating activities,


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investing activities and financing activities.

8 Notes to the Financial Statements Significant accounting policies are disclosed, togetherwith details of judgments made and key sources ofestimation uncertainty.

9 Consolidated and SeparateFinancial Statements

A parent entity is required to present consolidatedfinancial statements in which all its subsidiaries areincluded. There are some limited exceptions to thisrule.

10 Accounting Policies, Estimatesand Errors

Prior period errors are accounted for on aretrospective basis. Changes in accounting estimatesare recognized prospectively. Changes in accountingpolicy are accounted for on a retrospective basisunless specific transitional provisions apply.

11 Basic Financial Instruments An amortized cost or cost less impairment model isused for basic financial instruments such as cash,

loans and trade receivables and payables.

12 Other Financial InstrumentsIssues

Other financial instruments are generally measured atfair value through profit or loss. Examples of suchinstruments include asset backed securities, options,futures contracts, forward contracts, and interest rateswaps. Hedge accounting is permitted only for certainspecific types of risk. Certain conditions must be metin order to use hedge accounting.

13 Inventories Inventories are measured at the lower of cost and netrealizable value.

14 Investments in Associates Investments in associates are measured using any ofthe following: The cost model (cost less accumulated impairment); The equity model (initial recognition at cost, withsubsequent adjustments to reflect the investorsshare of the profit or loss and other comprehensiveincome of the associate); or The fair value model (compulsory where a publishedprice exists for the investment).

15 Investments in Joint Ventures An accounting policy election similar to that forassociates applies to investments in joint ventures.

Proportionate consolidation is not permitted.

16 Investment Property Investment property with fair value that can bemeasured reliably without undue cost or effort isaccounted for at fair value through profit or loss.Otherwise investment property is accounted for atcost less depreciation andimpairment.


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17 Property, Plant and Equipment Property, plant and equipment are measured at costless depreciation and impairment.

18 Intangible Assets other thanGoodwill

All internally developed intangibles, including allresearch and development activities, are expensedas incurred. Acquired intangibles meeting the criteria

for recognition are capitalized as assets andmeasured at cost less amortization and impairment.

All intangible assets are considered to have a finiteuseful life. Revaluation of intangible assets is notpermitted.

19 Business Combinations andGoodwill

Goodwill is measured at cost less amortization andimpairment. Where an entity is unable to make areliable estimate of the useful life of goodwill, its life ispresumed to be ten years and amortized over thatperiod.

20 Leases Finance leases are recognized as an asset by the

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

21 Provisions and Contingencies Present obligations are recognized as provisionswhen there is a probable outflow of economic benefitsand the amount of the obligation can be estimatedreliably. Contingent liabilities and contingent assetsare not recognized but are disclosed in the notes.

22 Liabilities and Equity Equity is the residual interest in the assets of an entityafter deducting all its liabilities. A financial liability is apresent obligation of the entity arising from pastevents, which is expected to result in an outflow ofeconomic benefits. Split accounting must be appliedto compound financial instruments (such asconvertible debt), which contain both a liability and anequity component.

23 Revenue For the sale of goods, revenue is recognized ontransfer of the significant risks and rewards ofownership. In most cases, this will coincide with thetransfer of legal title or the passing of possession tothe buyer. For services and construction contracts,revenue is recognized according to the stage ofcompletion at the end of the reporting period. Interest

and royalties receivable are recognized on an accrualbasis. Dividends are recognized when the right toreceive the payment is established.

24 Government Grants Government grants are recognized in income whenany specified performance conditions have been met.Where there are no such conditions, the grant isrecognized in income upon receipt.


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25 Borrowing Costs All borrowing costs are expensed as incurred.

26 Share-based Payment Employee share awards and share optionsare recognized as an expense in profit or loss overthe vesting period. A corresponding credit isrecognized in equity. These amounts are measuredat the fair value of the instruments provided.

27 Impairment of Assets An impairment loss is recognized when the carryingamount of an asset exceeds its recoverable amount.

28 Employee Benefits Contributions payable under defined contributionplans are recognized as expenses in the period inwhich they are due. For defined benefit pensionplans, an entity recognizes a liability for its obligationsnet of the plans assets. The net change in the liabilityduring the period is recognized as the cost of the planduring the period. Entities can choose to recognize allactuarial gains and losses in either profit or loss or inother comprehensive income.

29 Income Tax Deferred tax is calculated using a temporarydifference approach based on the difference betweenthe carrying amount of an asset and its tax base.

30 Foreign currency Translation Foreign currency transactions are translated into thefunctional currency of the reporting entity. Allmonetary items and those non-monetary items thatare measured at fair value are subsequentlyretranslated at the end of each reporting period.

31 Hyperinflation Entities subject to hyperinflation are required to stateall amounts at the prices that are current at the end of

the reporting period.

32 Events after the End of theReporting Period

Adjustment is made for events that provide evidenceof conditions that existed at the end of the reportingperiod. No adjustment is made for events that areindicative of conditions that arose after the end of thereporting period, although they are disclosed.

33 Related Party Disclosures Disclosures draw attention to the existence of relatedparties and transactions and balances with suchparties.

34 Specialized Activities Guidance is provided for three types of specializedactivitiesagriculture, extractive activities andservice concessions.

35 Transition to the IFRS for SMEs Mandatory exceptions to and optional exemptionsfrom the full requirements of the IFRS for SMEsenable the Standard to be applied more easily byentities adopting it for the first time.

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Accounting for SME

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