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PFRS for SmallEntities

Topi

csþ Scope of PFRS for

Small Entities (“theFramework”)

þ Key Differences withPFRS for SME andFull PFRS

þ TransitionalProvisions

Scope of the Framework

Financial Reporting Framework• On March 22, 2018, the Philippine SEC approved the adoption of the PFRS for

Small Entities.

• On March 26, 2018, the SEC issued SEC Memorandum Circular No. 5, Series of2018, amending Part 1, Section 2 of SRC Rule 68, As Amended. Summarizedbelow are the framework applicable to each type of entity (quantitative criteriaare in millions):

*Publicly-accountable entities have no quantitative criteria

Entities* Total assets Total liabilities Framework

Large >₱350 >₱250 PFRS

Medium-sized >₱100 - ₱350 >₱100 - ₱250 PFRS for SME

Small ₱3 - ₱100 ₱3 - ₱100 PFRS for SmallEntities

Micro <₱3 <₱3Income tax basis orPFRS for SmallEntities

Brief Background on PFRS for Small Entities

WHO? Who should adopt PFRS for Small Entities?

ü Small entities as defined by Philippine SEC

However, entities who have operations or investments that are basedor conducted in a different country with different functionalcurrency shall not apply this framework and should instead apply fullPFRS or PFRS for SMEs.


WHAT? What are small entities? (SRC Rule 68, As Amended)ü Small entities are those that meet all of the following criteria:

Quantitative characteristicsA Total assets ₱3 million - ₱100 million, or

Total liabilities ₱3 million - ₱100 million

B If the entity is a parent company, the said amounts shall be based on theconsolidated figures.

Qualitative characteristics

C Not required to file financial statements under Part II of SRC Rule 68;

D Not in the process of filing their financial statements for purpose ofissuing any class of instruments in public market; and

E Not holders of secondary licenses issued by regulatory agencies


WHO? Who can opt for exemption from mandatoryadoption of PFRS for Small Entities?

ü A small entity with group affiliationsreporting under or moving towards

þ Full PFRS or PFRS for SMEs, or

þ Full IFRS or IFRS for SMEs.


WHO? Who can opt for exemption from mandatoryadoption of PFRS for Small Entities?

ü Has a short term projection that show that it will breach thequantitative thresholds and the breach is expected to besignificant and continuing due to its long-term effect on thecompany’s asset size;

ü Has been preparing financial statements using full PFRS or PFRS forSMEs and has decided to liquidate;

ü Such other cases that the Commission may consider as validexceptions from the mandatory adoption of PFRS for Small Entities.

Practice Questions

What will happen if ME or SE breaches the required SECquantitative threshold for the definition of a ME or SE:

q At reporting date?

q During the year?

Illustrative Example

Company A’s reporting period is December 31.

Company A’s total assets and total liabilities as at December 31, 20x2and 20x1 are as follows:

20x2 20x1Total assets P125,000,000 P90,000,000Total liabilities 70,000,000 50,000,000


Questions

What is the appropriate framework that Company A should adopt in 20x2 in thefollowing scenarios:

1. In 20x2, Company A considers the breach in total assets as significant andcontinuing.

PFRS for SEs



2. In 20x2, Company A considers the breach in total assets as significant but notcontinuing.

PFRS for SEs


Financial StatementPresentation

Complete set of FS shall include: PFRS forSmall

Entities

PFRS forSME PFRS

Statement of Financial Position

Statement of Income

Statement of Comprehensive Income

Statement of Changes in Equity

Statement of Cash Flows

Notes, comprising summary ofsignificant accounting policy andother explanatory information

Financial Statement Presentation

Financial Statement PresentationComplete set of FS shall include: PFRS for

SmallEntities

PFRS forSME PFRS

If changes to equity during theperiod arise from:

w Profit or lossw Payment of dividendsw Correction of prior year errors

andw Changes in accounting policy

Entities may present Statement ofIncome and Retained Earnings.

Accounting Policies,Estimates, and Errors

Accounting Policies, Estimates,and Errors

PFRS for SmallEntities PFRS for SME PFRS

Changes in accounting policies andCorrection of prior period errors

How recognized?

Adjust theopening balanceof current year

retainedearnings

Restate the earliest periodpresented and each comparativeperiod as if the policy had alwaysapplied, to the extent practicable

Is restatement ofcomparativeinformation needed?

Is “third balancesheet” needed*?

N/A,restatement not

required*Required if the entity retrospectively applies an accounting policy, restates items, or reclassifies items,and those adjustments had a material effect on the information in the statement of financialposition/balance sheet at the beginning of the comparative period.

Inventories

InventoriesMeasurement

PFRS

for

Smal

l ent

ities

PFRS

and

PFRS

for

SME

Lower ofCost

Market Probableselling price

OR

Lower of

Cost

Estimated selling price lesscost to complete and sell

OR

Investment Property

Investment PropertyPFRS for Small Entities PFRS for SME PFRS

Scope

Accounting forinvestments in land orbuildings that meet thedefinition of investmentproperty.

Same Same

Only investmentproperty whose fairvalue can be measuredreliably without unduecost or effort

Investment PropertyPFRS for Small Entities PFRS for SME PFRS

Definition

Held by owner to earnrent or for capitalappreciation or both,rather than for:

a) use in the productionor supply of goods orservices or foradministrative purposes,or

b) sale in the ordinarycourse of business

Held by owner or by thelessee under a financelease to earn rent or forcapital appreciation orboth, rather than for:

a) use in the productionor supply of goods orservices or foradministrative purposes,or

b) sale in the ordinarycourse of business.

Same with PFRS for SME

Investment Property

InitialMeasurement

SubsequentMeasurement

Fair valuecannot bemeasured

reliably

PFRS for SmallEntities

Cost

Cost or FV

N/A

PFRS for SME

Cost

FVIf can be measured

reliably withoutundue cost or effort

Account as PPEat cost

PFRS

Costincluding borrowing costsdirectly attributable to theacquisition, construction or

production of a qualifying asset

Cost or FV

N/A

Investment PropertySubsequent Measurement of Investment Properties► Assume the following for illustration purposes:

On November 10, 20x8, Entity A purchased a parcel of land, to be held forlease, and incurred the following cost. The purchase was made on account:

Question 1 How much should Entity A capitalize as investment property on November 10,20x8?

Question 2 How much is the value of the investment property as of reporting date, i.e.,December 31, 20x8?

Amounts in ₱Total purchase price (sum of all installment payments) 1,500,000Present value of installment payments 1,200,000Transfer tax 20,000Brokers fee 10,000

Investment PropertySubsequent Measurement of Investment Properties

► Question 1 How much should Entity A capitalize as investment property onNovember 10, 20x8?

q Answer: ₱1,230,000

► Question 2 How much is the value of the investment property as ofDecember 31, 20x8?

q Answer: It depends on the Entity A’s accounting policy.

q Cost method – ₱1,230,000

q Fair value method – Based on the fair value as of December 31, 20x8,changes in fair value shall be recognized in profit or loss

Property and EquipmentPFRS for Small

Entities PFRS for SME PFRS

Subsequent measurement options

Cost model1

Fair value model2

Revaluation model3

1Cost model - cost less accumulated depreciation less impairment losses2Fair value model - fair value at each reporting date3Revaluation model - revalued amount less accumulated depreciation less impairment losses

Changes in fair valueFair value model1 P&L N/A N/ARevaluation model2 N/A OCI OCIImpairment losses P&L P&L P&L

Borrowing CostsPFRS for Small Entities PFRS for SME PFRS

Measurement

Must all be expensed asincurred

Must all be expensedas incurred

Can be capitalized ifdirectly attributableto the acquisition,construction orproduction of aqualifying asset

Employee Benefits

Employee BenefitsPFRS for Small Entities PFRS for SME PFRS

Definition

Accrual Approach

• Liability is basedon Current Salaryand Years ofService

• Does notconsider futurechanges insalary rates andservice periods

Defined benefit

Projected Unit Credit Method

Simplified Approach• Ignore estimated future salary

increase rates• Ignore future service of current

employees• Ignore possible in-service

mortality of current employees

P/L or OCI

Defined contribution

Defined benefit

Projected UnitCredit Method

Defined contributionProvisions for discounting

Employee BenefitsMeasurement of post employment benefit► Assume the following for illustration purposes:

On December 31, 20x8, Entity A has 15 employees, which includesEmployee B. The details of Employee B is as follows:

► Question What is the amount of pension liability to be recognized forEmployee B as of December 31, 20x8?

Monthly rate ₱15,000Equivalent half month salary per RA 7641 (22.5 days) ₱13,500Estimated half month salary rate at estimated year ofretirement (22.5 days) [includes future salary increase] ₱23,000Present value as of December 31, 20x8 of the estimated halfmonthly salary rate at year of retirement ₱18,000Years of service as of December 31, 20x8 5Remaining years of service up to retirement 15

► Answer: ₱67,500 [₱13,500 x 5 years]

Income Taxes

Income Taxes

PFRS for Small Entities PFRS for SME PFRS

Policy choice using either:

Taxes PayableMethod

DeferredIncome Tax

Method

Current Current

Deferred Deferred

Measurement of provision for income tax► Assume the following for illustration purposes:

The statutory corporate income tax rate applicable to Entity A in 20x8 is30%. Investment property is assumed to be an ordinary asset. All deductibletemporary differences are assessed to be recoverable. The reconciliation ofnet income before income tax and taxable income for the year endedDecember 31, 20x8 of Entity A is as follows:

► Question 1 What is the provision for current income tax of Entity A?► Question 2 What is the provision for deferred income tax of Entity A if:

a. Entity A applies taxes payable methodb. Entity A applies deferred income taxes method

Net income before income tax ₱1,000,000Reconciling items:

Change in fair value of investment property (100,000)Change in fair value of investment in listed equity instruments (50,000)Provision for impairment of inventories 20,000Interest income subject to final tax (15,000)

Taxable income ₱855,000

Income Taxes

Measurement of provision for income tax

► Question 1 What is the provision for current income tax of Entity A?

Taxable income ₱855,000Multiply by tax rate 30%Provision for current income tax ₱256,500

Income Taxes

► Answer: ₱256,500

Measurement of provision for income tax

► Question 2 What is the provision for deferred income tax of Entity A?

► Answer:

a. zero [All differences are treated as permanent differences]

b. ₱24,000

Change in fair value of investment property (₱100,000)Provision for impairment of inventories 20,000Net temporary taxable income (80,000)Income tax rate 30%Provision for deferred income tax ₱24,000

Income Taxes

Leases

LeasesPFRS for Small Entities PFRS for SME PFRS

No concept offinance lease

Leases are classifiedas operating orfinance

Same with PFRS forSME but, lesseesshould apply singlemodel to all leases

No requirement torecognize lease on astraight-line basis

Lease expense orincome on a straight-line basis

Right-of-use assetwith someexemptions

Lease income orexpense is recognizedin the profit or loss inthe period in whichthey are earned orincurred

LeasesMeasurement of leases

► Assume the following information for illustration purposes:

Entity A entered into a 5 year lease agreement, as a lessor, with 5%annual escalation. The present value of minimum lease receipts at theinception of the lease is ₱497,000. Annual lease receipts is as follows:

► Question What is the amount of rent income that Entity A shouldrecognize in Year 1 to Year 5 under PFRS for SE?

Amounts in ₱Year 1 100,000Year 2 105,000Year 3 110,250Year 4 115,763Year 5 121,551

LeasesMeasurement of leases

► Assume the following information for illustration purposes:

Answer: rent income shall be measured as earned, as follows:

Under PFRS for Small Entities, there’s no concept of finance lease or straight linerecognition of leases.

Amounts in ₱Year 1 100,000Year 2 105,000Year 3 110,250Year 4 115,763Year 5 121,551

Basic Financial Instruments

Basic Financial InstrumentsPFRS for Small

Entities PFRS for SME PFRS

Accounting policy choice

No accountingpolicy choiceavailable inaccounting forbasic financialinstruments

Provisions ofSection 11 and 12under PAS 39

Provisions ofPFRS 9

Basic Financial InstrumentsPFRS for Small Entities PFRS for SME PFRS

Initial measurement

Transaction Price includingtransaction cost.

Same Same (except financial asset orliability at fair value throughprofit or loss) but, subject toPFRS 9 para. 5.1.2A

If the arrangement constitutesa financing transaction, at thepresent value of the futurepayments discounted at amarket rate of interest for asimilar debt instrument

Same

Investments in non-convertiblepreference shares and non-puttable ordinary or preferenceshares that are required orpermitted to be measured atFVPL.

Basic Financial InstrumentsPF

RS fo

rSM

E

DebtInstruments Amortized cost

EquityInstruments

Publicly Traded orFV can be measured

reliably

Not publicly traded/All other

investments

Fair Value

Cost lessimpairment

PFRS

for

Smal

lEn

titie

sDebt

Instruments Amortized cost

EquityInstruments

Publicly Traded orFV can be measured

reliably

Not publiclytraded

Lower of Cost orFair Value

Cost lessimpairment

Basic Financial InstrumentsPF

RSDebt Derivatives Equity

Amortizedcost

FVOCI(with recycling)

FVPLFVOCI

(no recycling)

Held for trading?

FVOCIoption

elected?

A Hold-to-collect

contractualcash flows

B BM withobjective that

results incollecting

contractual cashflows and sellingfinancial assets

Neither(A) nor (B)

Business model test(at an aggregate level)

Conditional fair value option elected?

Contractual cash flow characteristics test (at instrument level)

Transition to the Framework


First-time adoption

• An entity’s first financial statements that conform tothis Framework are the first annual financial statementsin which the entity makes an explicit and unreservedstatement in those financial statements ofcompliance with this Framework.

• An entity’s date of transition to this Framework is thebeginning of the earliest period for which the entitypresents full comparative information in accordancewith this Framework.


Procedures for preparing financial statements at thedate of transition (Cont.)

► The accounting policies that an entity uses in its openingstatement of financial position under this Framework maydiffer from those that it used for the same date using itsprevious financial reporting framework. The resultingadjustments arise from transactions, other events orconditions before the date of transition to this Framework.Therefore, an entity shall recognize those adjustmentsdirectly in retained earnings (or, if appropriate, anothercategory of equity) at the date of transition to this Framework.


Transition date

► January 1, 2019

► Early application is permitted

Thank you!

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