SMALL AND

MEDIUM-SIZED
ENTERPRISES
SME’s
(1) Definition and Criteria
(2) Comparison with Full
IFRS
(a) Investment In
Associates
(b) Joint Arrangements
(c) Business
Combination
(3) Problems
Small and Medium-Sized Enterprises

▪ Small and mid-size enterprises (SMEs) are businesses that maintain

revenues, assets or a number of employees below a certain threshold.
▪ Each country has its own definition of what constitutes a small and
medium-sized enterprise (SME).
▪ Small and mid-size enterprises (SMEs) play an important role in the
economy, employing vast numbers of people and helping to shape
innovation.
▪ Governments regularly offer incentives, including favorable tax
treatment and better access to loans, to help keep them in business
 LARGE SME MICRO
FS Framework PFRS PFRS for SMEs the option to use as
their financial reporting
framework either the
income tax basis,
accounting standards in
effect as of December
31, 2004 or PFRS for
SMEs

Criteria:

Total Assets or Total assets of more Total assets of Total assets of

Liabilities than P350 Million or between P3M to liabilities are below
total liabilities of P350 Million or total P3 Million
more than P250 liabilities between
Million P3M to P250M
 LARGE SME MICRO
Is it required to YES NO NO
file financial
statements
under Part II of
SRC Rule 68;

Is it in the YES NO NO
process of
filing their
financial
statements for
the purpose of
issuing any
class of
instruments in
a public
market
 LARGE SME MICRO
It is a holder of YES NO NO
a secondary
license issued
by a regulatory
agency?

Is it a public YES NO NO
utility?
Exemptions to the Rule

▪ SME which is a subsidiary of a parent company reporting under

the PFRS or foreign parent company/foreign headquarters
reporting under IFRS
▪ SME that has the intention of being an entity which will be
subject to PFRS. (ex become publicly held etc.)
▪ SMEs that are part of either a joint venture or associate
reporting under PFRS
▪ SMEs that are a branch office of a foreign company that uses
IFRS
Investment in Associates
With comparison of Full IFRS

9
Investment in Associates
Investment in Associates IFRS for SMEs Full IFRS

Definition Significant influence Same as IFRS for SMEs

Significant influence Power to participate in the Same

financial and operating
policy decisions

Measurement after initial - Cost model Equity method

recognition - Equity method
- Fair value model

Cost model Cost less any accumulated Not permitted

impairment losses
Investment in Associates IFRS for SMEs Full IFRS

Equity method Transaction price (including Cost

transaction costs)

Fair value Transaction price (excluding Not permitted

transaction costs)

Separate financial statements Section 9.26 IAS 27.10

Classification and presentation Non-current asset Same

Investment in Joint Venture
With comparison of Full IFRS

9
Investment in Joint Venture

Investment in Joint Venture IFRS for SMEs Full IFRS

Definition Contractual Arrangement Right to net asset

Forms of Joint Venture ● Jointly controlled

operations
● Jointly controlled assets
● Jointly controlled entities

Accounting for jointly ● Cost Model

controlled entities ● Equity Method ● Equity Method
● Fair Value Model

Cost Model Cost less any accumulated Not permitted

impairment losses
Investment in Joint Venture

Investment in Joint Venture IFRS for SMEs Full IFRS

Equity Method IFRS for SMEs 14.8 IAS 28

Proportionate Consolidation Not permitted ● Similar items, line by line

● Separate line items

Fair Value Transaction price excludes Not permitted

transaction costs

Separate Financial Statements IFRS for SMEs 9.26 IAS 27.37

Investment in Joint Venture

Investment in Joint Venture IFRS for SMEs Full IFRS

Accounting for contributions to IFRS for SMEs 15.16

a jointly controlled entity

Accounting for jointly IFRS for SMEs 15.5

controlled operations

Accounting for jointly IFRS for SMEs 15.7

controlled assets
Business Combination
With comparison of Full IFRS

9
 Business Combination PFRS for SMEs FULL PFRS
Scope SAME SAME
Definition Combination of separate Acquirer obtains control
entity
Acquisition Date Obtains control SAME
Accounting Acquisition Method SAME
Acquirer SAME *diff indicators SAME *diff indicators
Cost of Acquisition Assets, Liabilities, Equity, SAME but Transaction
and Directly Attributable Costs are expensed
Costs at FV
Transaction Costs Capitalized Expensed
 Business Combination PFRS for SMEs FULL PFRS
Adjustments to Business Recognized if probable and can Recognized regardless of
Combination Costs Contingent be measured reliably probability
on Future Events
Goodwill Cost - Amort - Imp Loss Consideration + NCI + FV of
equity interest - NA recognized
*amortized every year
Scope of CSF Based on control or voting SAME + guidance to voting
power/rights rights
NCI presentation *BS, P/L AND TCI to NCI and SAME
Parent’s SCI
Accounting Policies Uniform SAME
Disclosures Information/Description SAME
regarding the business
combination should be
disclosed.
 Problems
With comparative solution of
full IFRS and SMEs

18
Investment in Associates P1
Answers:
Investment in Associates P2
 Answers:

Income = 30,000 x 20% = 6,000

Good will to be amort. = (240,000 - (880,000 x .2) / 10 yrs) = 6,400
Inv. Inc = (36,000 x .2) - (6,400 x 6/12) = 4,000
Investment in Associates P3
Answers:
Investment in Associates P4
Answers:
Investment in Associates P5
Answers:
 Investment in Joint Arrangements P1
On January 1, 2018 entities A and B each acquired 30% of the ordinary shares
that carry voting rights at a general meeting of shareholders of entity Z for P300,000.
Entities A and B immediately agreed to share control over entity Z. For the year ended
December 31, 2018 entity recognized a profit of P 400,000.
On December 30,2018 entity Z declared and paid a dividend of P 150,000 for the
year 2011. At December 31, 2018, the fair value of each ventures’ investment in entity
Z is P 425,0000. However, there was no published price quotation for entity Z.
 Investment in Joint Arrangements P2
On January 1, 2018, entities A and B each acquired 30 percent of the ordinary
shared that carry voting rights at a general meeting of shareholders of entity Z for
P300,000. Entities A and B immediately agreed to share control over entity Z. For
the year ended December 31, 2018, entity Z recognized a profit of P400,000.

Also on January 1, 2018, each venturer’s share of the fair value of the net
identifiable assets of entity Z is P280,000 and the fair value of on entity Z’s asset (a
machine) exceeded its carrying amount (in entity Z’s statement of financial
position) by P50,000. That machine is depreciated on the straight-line method to a
nil residual value over its remaining five-year useful life.
 Investment in Joint Arrangements P2
Entities A and B estimated the useful life of the implicit goodwill as five years.

On December 30, 2018, entity Z declared and paid a dividend of P150,000 for the
year 2018. At December 31, 2018, the fair value of each venturer’s investment in
entity Z is P425,000. However, there is no published quotation for entity Z.
 Investment in Joint Arrangements P3
On January 1, 2018 SME A and SME B each acquired 25% of the equity of
entities X,Y, and Z for P10, 000, P15,000, and P28,000 respectively. SME A
and SME B have joint control over the strategic financial and operating
decisions of entities X, Y, and Z. Transaction cost of 1% of the purchase price
of the shares were incurred by SME A and SME B.

On January 2, 2018 entity X declared and paid dividend of P1,000 for the
year ended 2010. On December 31, 2018 entity Y declared a dividend of P8
000 for the year ended 2011. The dividend declared by entity Y was paid in
2012.
 Investment in Joint Arrangements P3
For the year ended December 31, 2018, entities X and Y recognized profit
of respectively P 5,000 and P18,000. However, entity Z recognized a loss of
P20,000 for that year. Published price of quotations do not exist for the shares
of entities X, Y, Z. using appropriate valuation techniques the ventures (i.e.
SME a and SME B) determined the fair value of each their investment in
entities X,Y,Z at December 31, 2011 as P13,000, P29,000 and P15,000
respectively. Cost to sell are estimated at 5% of the fair value of the
investment.

Neither SME A nor SME B prepares consolidated financial statements

because they do not have any subsidiaries. SME A measures its investments
in jointly controlled entities using cost model and SME B measure its
investment using the FV model.
 Investment in Joint Arrangements P4
On March 1, 2011 entities A and B each acquired 30% of the ordinary shares that carry voting rights at a
general meeting of shareholders of entity Z for P300,000. Entities A and B immediately agreed to share control
over entity Z. On December 30,2011 entity Z declared a dividend of P 100,000 for the year 2011. Entity
reported a profit of P80,000 for the year ended December 31,2011. On December 31, 2011, the recoverable
amount of each venturer’s investment in entity Z is P 290,0000 (calculation FV P293,000-cost to sell P3,000.
There is no published price quotation for entity Z.
Investment in Joint Arrangements P5
On January 1, 2018, entities A and B (the venturers) form a joint venture (entity Z). Upon incorporation
of entity Z, entities A and B each take up 50 percent of the share capital of entity Z. In return for their
interests in entity Z, entities A and B each contribute P100,000 to entity Z. Entity A contributes a
machine with a fair value of P100,000 and a carrying amount of P80,000. Entity B’s contribution is
P100,000 cash.
The machine contributed by entity A has an estimated useful life of 10 years with no residual value.
Entity Z’s profit for the year ended December 31, 2018 is P30,000 (after deducting depreciation
expense of P10,000 on the machine contributed by entity A)
Entity A accounts for jointly controlled entities using the equity method.
Business Combination-P1
The VV Company had the Bush Co. paid P1.4M for VV
following accounts before it was Co.’s net assets. It was determined
acquired by Bush Company. that FV of inventories and PPE were
P133,000 and P900,000,
respectively.
Cash P 36,000
An assumed contingent liability
AR 457,100
arising from past events with a fair
Inventory 120,000 value amounting to P10,000 and
PPE 696,400 such amount is considered a
AP 350,800 reliable measurement.

39 What is the amount of Goodwill?

Business Combination-P1 Solution
Consideration transferred P1,400,000
Cash P 36,000
AR 457,100
Inventory 133,000
PPE 900,000
AP (350,800)
Provision for Liability (10,000) 1,165,200
Goodwill P 234,800

40
Business Combination-P2
ABC acquires 100% of TUV Co. December 31, 2019
when the fair values of assets and liabilities of TUV Co.
are P10M and P2M respectively. ABC issues 80,000 of
its P100 par share with fair values of P150 per share.
In addition, the combining firms agreed on the
following.

The cost of business combination and goodwill on

December 31, 2019?
Business Combination-P2 Solution
Price Paid (80,000 shares x P150 par) P12.0M
Fair Value of TUV’s Assets P10.0M
Fair Value of TUV’s Liabilities (2.0M) 8.0M
Goodwill P 4.OM
Business Combination-P3
On July 1, 2017, B Company acquired 100% of the A company for a
consideration transferred of P160M. At the acquisition date, the
carrying amount of A company’s net assets was P100M. In the same
day, a provisional value of P120M was attributed to the net assets. An
additional valuation received on May 31, 2018 increased this
provisional FV to P135M and on July 30, 2018 this FV was finalized to
P140M.
1) What amount should B company present for goodwill in its
statement of financial position at December 2018 accd to IFRS 3 ?
2) Journal entries to record the business combination and the
necessary adjustments.
43
Business Combination-P3 Solutions
2017 2018
Consideration Transferred P160M P160M
FV of A’s net assets (120M) (135M)
Goodwill on July 2017 P 40M P 25M

2017 entry: 2018 entry:

Assets 120M Asset 15M
GW 40M GW 15M
Cash 100M
44
Business Combination-P4
Effective Dec 31, 2018, E Co. proposes
to acquire, in a one-for-one exchange of
common stock, all the assets and
liabilities of D Co. and R Co, after which
the latter two companies will distribute
the E Co. stock to their shareholders in
complete liquidation and dissolution. E
Co. proposes to increase its outstanding
stock for purposes of these acquisition.
Balance sheets of each of the
companies immediately prior to merger
on 12/31/18 in book values are:
45
Business Combination-P4
The fair Value of the common Shares of
E Co. reflects the impact of the increased
number of shares to be issued.
1) How much goodwill will be
recognized as a result of business
combination?
2) How much is the total assets of E
after business combination?
3) How much is the total equity of E
after the business combination?

46
Business Combination-P4 Solution
Required 1:

D. CO. R. CO.

Cost of P 4,000,000 P 200,000

Acquisition
FV of Net 3,200,000 100,000
Assets
Goodwill P 800,000 P 100,000

47
Business Combination-P4 Solution
Required 2:

Book Value P 12,000,000

FV of D & R 4,725,000
Goodwill 900,000
TOTAL ASSETS P 17,625,000

48
Business Combination-P4 Solution
Required 3:

SHE of E. Co. P 8,000,000

FV of New Shares 4,200,000
TOTAL SHE P12,200,000

49
Business Combination- P5
On January 2, 2019 P Corp. issues its
own P10 par common stock for all the
outstanding stock of S Corp, and S is
dissolved. In addition, P pays P20,000
for registering and issuing securities
and P30,000 for other costs of
combination. The market price of P’s
stock on January 2, 2019 is P30 per
share. Balance sheet of P and S on
January 1, 2019 before business
combination, is at follows:
50
Business Combination- P5
Assume that P issues 30,000 shares
of its stock for all of S’s outstanding
shares.
1)Prepare journal entries to record the
business combination of P and S.
2) Prepare a balance sheet for P Corp
immediately after the business
combination

51
Solutions:

Cost of Acquisition P900,000 SHE of P P800,000

FV of Net Assets (500,000) FV of New Shares 900,000
Goodwill P400,000 Costs (50,000)
SHE of P P1,650,000
Book Value of P P1,000,000
FV of S 550,000 Total Assets P1,900,000
Goodwill 400,000 SHE of P 1,650,000
Other Costs (50,000) TOTAL LIABILITIES P 250,000
TOTAL ASSETS P1,900,000
Business Combination-P5 Solution
For Full PFRS

JOURNAL ENTRIES:
Cash 10,000
Inventory 40,000
Other CA 100,000
Land 100,000
PPE 300,000
GW/Gain 250,000
Liabilities 50,000
53 SC/CS 250,000
Share Premium/APIC 500,000
Business Combination-P5 Solution
PFRS for SMEs

JOURNAL ENTRIES:
Transaction Costs 50,000
Other CA 100,000
Land 100,000
PPE 300,000
GW/Gain 250,000
Liabilities 50,000
SC/CS 250,000
54 Share Premium/APIC 500,000
Business Combination-P5 Solution
PFRS for SMEs

JOURNAL ENTRIES:
GW/Gain. 50,000
SC. 50,000

55
Business Combination-P5 Solution
Cash P 80,000
Inventory 90,000
BALANCE SHEET:
Other CA 200,000
Land 180,000
PPE 950,000
Goodwill 400,000
TOTAL P 1,900,000
Liabilities 250,000
Capital Stock 900,000
Share Premium/APIC 680,000
Retained Earnings 70,000
56
TOTAL P 1,900,000