University of San Jose – Recoletos

School of Business and Management

Accountancy and Finance Department
Updates to Financial Reporting
Standards
Mr. Jun Brian Alenton
CPA, CMA, CAT, RCA, MICB, MBA

Module 1.A
PFRS for Small
Entities

PFRS for Small Entities Section by Section Summary

Preface

Some of the key simplifications introduced by the PFRS for Small Entities are as follows:
 Inventories are to be subsequently valued at the lower of cost and market value,
 Investment properties can be carried either at cost or at fair value, depending on the policy
choice made by the entity.
 There is no concept of "finance lease".
 There is no accounting for onerous contracts.
 For equity-settled share-based payment transactions, an entity shall measure the goods or
services received, and the corresponding increase in equity, with reference to the net
asset value of the equity instruments granted. Net asset value is derived by dividing the
total assets of the entity less any liabilities, by the number of shares outstanding at
measurement date.
 For defined benefit plans, an entity is required to use the accrual approach in calculating
benefit obligations in accordance with Republic Act (RA) 7641, The Philippine Retirement
Pay Law, or company policy (if superior than RA 7641). Accrual approach is applied by
calculating the expected liability as of reporting date using the current salary of the entitled
employees and the employees' years of service, without consideration of future changes in
salary rates and service periods.
 Entities are given a policy choice of not recognizing deferred taxes in the financial statements.
 Biological assets can be carried either at cost or at current market price, depending on
the policy choice made by the entity.
 Prior period adjustments are just captured in the opening balance of the current year, but
with appropriate disclosures.

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 Section 1 – Scope

PFRS for SEs is intended for use by small entities as defined by the Philippine SEC.

Entities who have operations or investments that are based or conducted in a different country
with a different functional currency shall not apply PFRS for SEs and should instead apply the
full PFRS or PFRS for SMEs.

Exemption from mandatory adoption of the PFRS for Small entities and may instead apply, as
appropriate, the full PFRS or PFRS for SMEs:
1. A small entity which is a subsidiary of a parent company reporting under the PFRS or PFRS for
SMEs;
2. A small entity which is a subsidiary of a foreign parent company which will be moving
towards IFRS or IFRS for SMEs pursuant to the foreign country’s published convergence
plan;
3. A small entity, either as a significant joint venture or associate, is part of a group that is
reporting under the PFRS or PFRS for SMEs;
4. A small entity which is a branch office or regional operating headquarter of a foreign
company reporting under the IFRS or IFRS for SMEs;
5. A small entity which has a short term projection that show that it will breach the
quantitative thresholds set in the criteria for a small entity. The breach is expected to be
significant and continuing due to its long-term effect on the company’s asset or liability size;
6. A small entity which has been preparing financial statements using PFRS or PFRS for SMEs
and has decided to liquidate; and
7. Such other cases that the Commission may consider as valid exceptions from the
mandatory adoption of PFRS for SMEs.

Section 2 – Concepts and Pervasive PrinciplesObjective of SEs' financial statements: To

provide information about financial position, performance, cash flows
 Basic recognition concept – An item that meets the definition of an asset, liability, income, or
expense is recognised in the financial statements if:
o it is probable that future benefits associated with the item will flow to or from the entity, and
o the item has a cost or value that can be measured reliably
 Measurement requirements are generally set out in the individual sections. However guidance on
fair value relevant to several sections is included in this section.
 Offsetting of assets and liabilities or of income and expenses is prohibited unless expressly
required or permitted

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 Section 3 – Financial Statement Presentation

Components of financial statements

1. A statement of financial position
2. A statement of income
3. A statement of changes in equity
4. A statement of cash flows
5. Notes to financial statements

Statements of income and changes in equity can be combined if the only changes to equity arise from profit
or loss, payment of dividends, corrections of prior period errors, and changes in accounting policy.

Disclosure of information about key sources of estimation uncertainty and judgments NOT mandatory.

Section 4 – Subsidiaries

The section covers:

 accounting policies available for a parent company with investment in a subsidiary;
 procedures for preparing consolidated financial statements; and
 guidance on separate financial statements.

Accounting policy choice to:

a) consolidate its subsidiaries; or
b) account for its subsidiaries using the equity method as described in Section 9 - Investments in
Associates.

Separate financial statements refers to:

a) An investor’s financial statements that are presented in addition to consolidated financial statements; or
b) An investor’s financial statements that are presented as the company’s only financial statements
because it has taken an exemption from consolidation or from applying the equity method

Accounting policy election for investments in subsidiaries in separate financial statements:

a) at cost less impairment, or
b) at equity method (using the procedures in Section 9 - Investments in Associates).

Any entity should provide the following disclosures:

 method used to account for its subsidiaries.
 listing and description of all subsidiaries, including their names, carrying amounts, and the proportion
of ownership interests held in each subsidiary.
 any difference in the reporting date of the financial statements of the parent and its subsidiaries

In addition to a - c above, an entity that chose the equity method should disclose separately any dividends
received from the subsidiaries and its share of the profit or loss of such subsidiaries.

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 Section 5 – Accounting Policies, Estimates and Errors

Selection of accounting policies and use of other guidance

When PFRS for Small Entities does not address a transaction, other event or condition, management uses
its judgment in developing and applying an accounting policy that results in information that is relevant and
reliable.

If there is no relevant guidance, management considers the following sources, in descending order:
a) the requirements and guidance of PFRS for Small Entities dealing with similar and related issues, and
b) the definitions, recognition criteria and measurement concepts for assets, liabilities, income and
expenses and the pervasive principles in Section 2.

Management may also consider the requirements and guidance in PFRS for Small and Medium-sized
Entities (PFRS for SMEs) dealing with similar and related issues.

Change in accounting policies

An entity shall account for changes in accounting policy as follows:
a) Applied to the carrying amounts of assets and liabilities at the beginning of the current period. Any
cumulative effect shall be recognized as an adjustment to the opening balance of retained earnings (or
other component of equity, as appropriate) of the current period.
b) Comparative information shall not be restated.

Changes in accounting estimates

Changes in accounting estimates are recognized prospectively by including the effects in profit or loss in
the period that is affected.

If the change in estimates gives rise to changes in assets, liabilities or equity, it is recognized by adjusting
the carrying amount of the related asset, liability or equity in the period of change.

Correction of errors
An entity shall correct material prior period errors as follows:
 No restatement of comparatives
 Adjustments are recognized against opening balance of current year retained earnings (or other
component of equity)

Disclosures
Change in accounting policy/correction of error
 the nature of the change or prior period error and the amount of adjustments to the carrying amounts
of assets and liabilities at the beginning of the current period and any cumulative effect recognized as an
adjustment to the opening balance of equity;
 in the notes, for each financial statement line item affected in the prior period, the amount of the
necessary adjustment and the adjusted amount had the new accounting policy or correction been

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 applied in the prior period.
Change in estimate
 nature and amount of a change in an accounting estimate that has an effect in the current period

Section 6 – Basic Financial Instruments

Covers:
a) cash;
b) the following receivables and payables subject to certain requirements:
i. bank deposits;
ii. trade receivables and payables;
iii. loans receivable and payable;
iv. notes receivable and payable; and
c) investments in non-convertible preference shares and non-puttable ordinary shares.

Initial measurement
Transaction price (including transaction costs) unless the arrangement constitutes a financing transaction,
in which case, the financial asset or financial liability at the present value of the future payments
discounted at a market rate of interest for a similar debt instrument.

Subsequent measurement
 Debt instruments are measured at amortized cost using the effective interest method
 Investments in shares shall be carried at cost less impairment, unless the investment in shares are
traded in an active market, which shall be measured at the lower of cost or fair value, with changes in
fair value recognized in profit or loss.

Impairment of financial assets measured at cost or amortized cost

 An entity shall recognize impairment loss if there is objective evidence of impairment
 Impairment loss is the difference between the asset’s carrying amount and the present value of cash
flows (for assets measured at amortized cost) or best estimate of selling price (for assets measured at
cost).

Derecognition of financial asset

Financial asset is derecognized when:
 the contractual rights to the cash flows from the financial asset expire or are settled; or
 the entity transfers to another party substantially all of the risks and rewards of ownership of the
financial asset.

Derecognition of financial liability

Financial liability is derecognized when it is extinguished - i.e., when the obligation specified in the
contract is discharged, is cancelled or has expired.

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 Section 7 – Other Financial Instruments

Initial measurement
At fair value, which is normally the transaction price.

Subsequent measurement
 Fair value with changes in fair value recognized in profit or loss.
 Equity instruments that are not publicly traded and whose fair value cannot be measured reliably
are measured at cost less impairment.
 Hedge of variable interest rate risk of a recognized financial instrument, foreign exchange risk or
commodity price risk in a firm commitment or highly probable forecast transaction - effective portion
recognized in hedging reserve (equity account) while ineffective portion is recognized in profit or loss.

Derecognition
Similar with basic financial instruments.

Section 8 – Inventories

Measurement
Initially measured at cost (cost of purchase, cost of conversion, and other directly attributable costs)

Cost formulas
The cost of inventories, other than those measured using specific identification, by using the first-in, first-
out (FIFO) or weighted average cost formula. Last-in, first-out method (LIFO) is not permitted.

Subsequent measurement = Lower of cost or market value

Disclosures
An entity shall disclose the following:
 the accounting policies adopted in measuring inventories, including the cost formula used;
 the total carrying amount of inventories and the carrying amount in classifications appropriate to the
entity;
 the amount of inventories recognized as an expense during the period;
 impairment losses recognized or reversed in profit or loss in accordance with Section 21 - Impairment
of Assets; and
 the total carrying amount of inventories pledged as security for liabilities.

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 Section 9 – Investments in Associates

Measurement
Option to apply:
 Cost model; or
 Equity method

Cost model
Measured at cost less any accumulated impairment
losses. All dividends are recognized in the income
statement.

Equity method
An associate is initially recognized at the transaction price (including transaction costs) and is
subsequently adjusted to reflect the investor’s share of the profit or loss of the associate.

Distributions received from the associate reduce the carrying amount of the investment.

Notional purchase price allocation

On acquisition, an investor shall account for any difference between the cost of acquisition and the
investor’s share of the fair values of the net identifiable assets of the associate.

Equity pick-up shall be adjusted for additional depreciation or amortization of the associate’s depreciable
or amortizable assets (including goodwill) on the basis of difference between fair value and carrying
amount on acquisition date.

Disclosures
 Name of the associate; principal place of business; ownership interest, accounting policy, and
carrying amount
 If accounting policy is cost method - amount of dividends and other distributions recognized as income
 If accounting policy is equity method - share of profit or loss, and fair value of investment if there
are published price quotations.

Section 10 – Joint Arrangements

Classification
Classified either as (a) joint venture; or (b) joint operations, depending on the rights and obligations of
the parties to the arrangement

Joint operations
Investor account for rights and obligations by recognizing its own assets, liabilities, revenue, and expenses,
as well as its share of assets, liabilities, revenue, expenses, held/earned/incurred jointly from the joint

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 operation.
Joint venture - measurement
Option to apply:
 Cost model; or
 Equity method

Transactions between a venturer and a joint venture

Gains and losses on contribution or sales of assets to a joint venture are recognized only on the
portion attributable to the interests of the other venturers provided the assets are retained by the joint
venture and significant risks and rewards of ownership have been transferred.

Disclosures
 Name and type of joint arrangement; principal place of business, ownership interest
 For joint venture - accounting policy elected, carrying amount, fair value of investment if equity
method is used and there are published price quotations, amount of dividends recognized in income if
cost method is used

Section 11 – Investment Property

Recognition and measurement

Initially measured at cost. The cost of a purchased investment property comprises its purchase price and
any directly attributable expenditures.

Subsequent measurement, option to apply:

 Cost model
 Fair value Model

Cost model
Investment properties are carried at cost less accumulated depreciation and any accumulated impairment
losses.

Fair value model

Changes in fair value is recognized in profit or loss.
If a reliable measure of fair value is no longer available without undue cost or effort, it will be accounted
for under the cost model. Carrying amount at date of change becomes the cost.

Transfers
Transfer to or from investment properties applies when the property meets or ceases to meet the definition
of an investment property.

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 Disclosures
 Under cost model, depreciation method, useful lives, gross carrying amount and accumulated
depreciation, reconciliation of the carrying amount;
 Under fair value model, whether independent valuer was involved, method and significant assumptions
used in valuation, reconciliation of carrying amount; and
 Existence and carrying amount of property with restricted title or was used as a security.

Section 12 – Property, Plant and Equipment

Measurement
Initially measured at cost which includes:
 Purchase price
 Any directly attributable costs to bring the asset to the location and condition necessary for it to be
capable of operating in the manner intended by management.

Subsequent measurement, option to apply:

 Cost model
 Fair value Model

Depreciable amount and depreciation period

The depreciable amount is allocated over its useful life.
Change in residual value or useful life is accounted for as a change in estimate

Depreciation method
 The depreciation method is reviewed if there is an indication that there has been a significant change
since the last annual reporting date.
 Change in the depreciation method is accounted for as a change in estimate.

Fair value model

 Changes in fair value is recognized in profit or loss.
 If a reliable measure of fair value is no longer available without undue cost or effort, it will be
accounted for under the cost model. Carrying amount at date of change becomes the cost.

Derecognition
 Derecognize on disposal or when no future economic benefits are expected from its use or disposal.

Disclosures
 Under cost model, depreciation method, useful lives, gross carrying amount and accumulated
depreciation, reconciliation of the carrying amount;
 Under fair value model, whether independent valuer was involved, method and significant assumptions
used in valuation, reconciliation of carrying amount; and
 Existence and carrying amount of property with restricted title or was used as a security.

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 Section 13 – Intangible Assets Other than Goodwill

Recognition and measurement

Initially measured at cost and subsequently accounted for a cost model.

Useful life
Useful life is considered finite.

If an entity is unable to make a reliable estimate of the useful life of an intangible asset, the life shall
be determined based on management’s best estimate but shall not exceed ten (10) years.

Classification
Intangibles acquired through business combination must be identified and accounted for by:
(a) separately recognizing the intangible asset as an identifiable asset; or
(b) subsuming into goodwill

Disclosures
 Depreciation method, useful lives, gross carrying amount and accumulated depreciation, reconciliation
of the carrying amount; line item in the income statement where amortization was included; and
 Existence and carrying amount of asset with restricted title or was used as a security.

Section 14 – Business Combinations and Goodwill

Accounting
All business combinations shall be accounted for by applying the purchase method.

Goodwill
After initial recognition, the acquirer shall measure goodwill acquired in a business combination at cost
less accumulated amortization and accumulated impairment losses.

An entity shall amortize goodwill on a systematic basis over its useful life. The life shall be determined
based on management’s best estimate but shall not exceed ten (10) years.

Disclosures
Disclosure requirements under paragraph 288-289 apply.

Section 15 – Leases

Classification
No distinction between finance and operating lease.

Measurement

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 All receipts/payments are recognized as income/expense as earned/incurred.
Section 16 – Provisions and Contingencies

Initial recognition
An entity shall recognize a provision only when:
a) the entity has an obligation at the reporting date as a result of a past event;
b) it is probable (i.e., more likely than not) that the entity will be required to transfer economic benefits
in settlement; and
c) the amount of the obligation can be estimated reliably

A contingent liability is either a possible but uncertain obligation or a present obligation that is not
recognized because it fails to meet one or both of the conditions b or c above.

Measurement
An entity shall measure a provision at the best estimate of the amount required to settle the obligation at
the reporting date.

Disclosures
Provisions
 Reconciliation of the account; description of the nature of obligation and expected amount/timing
of payment; indication of uncertainties about the timing and amount; expected reimbursements.

Contingent liabilities (if not remote)

 Description of nature of the contingent liability; if practicable, an estimate of financial effect, and
possibility of reimbursement.

Contingent assets (if probable)

 Description of nature of contingent asset and if practicable, estimate of financial effect.

Section 17 – Equity

Recognition and measurement

 An entity shall measure the equity instruments at the amount of cash received.
 If payment is deferred and the time value of money is material, the initial measurement shall be on a
present value basis.
 If the equity instruments are exchanged for resources other than cash, the equity instruments shall
be recognized at the fair value of those resources.
 An entity shall account for the transaction costs (i.e., incremental costs that are directly attributable to
the issue)

Distribution to owners
 An entity shall reduce equity for the amount of distributions to its owners (holders of its equity
instruments), net of any related income tax benefits.

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 Section 18 – Revenue

Recognition
The revenue section captures all revenue transactions from the following transactions or events:
 Sale of goods.
 Rendering of services;
 Construction contracts;
 Deposits or receivables yielding interest; and
 dividends from investments in shares of stock that are not accounted for using the equity method.

Revenue recognition criteria for each of these categories include the probability that the economic
benefits associated with the transaction will flow to the entity and that the revenue and costs can be
measured reliably. Additional recognition criteria apply within each broad category.

Measurement
Measurement of revenue at the fair value of the consideration received or receivable is required.

Disclosures
 Accounting policies, including method to determine the stage of completion for transactions
involving rendering of services
 Amount of revenue for each category (sale of goods, rendering of services, interest, commissions)
 For construction contracts - amount and method used to determine contract revenue, methods used
to determine percentage of completion, gross amount due from/to customers.

Section 19 – Borrowing Costs

Recognition
All borrowing costs as an expense in profit or loss in the period in which they are incurred.

Disclosures
Disclosure requirements for financial liabilities apply.

Section 20 – Share-based Payment

Recognition and measurement

All transactions involving share-based payment are recognized as expenses or assets over any vesting
period. Distinguishes between cash-settled and equity-settled arrangements.
For equity-settled awards, the value of goods or services acquired must be recognized with reference to
the net asset value (total assets less liabilities divided by outstanding shares) of the entity.

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 Disclosures
 Description, including terms and conditions, of each share-based arrangement;
 Number and weighted-average prices of each group of options outstanding, granted, forfeited,
exercised, expired, outstanding, and exercisable;
 For cash settled - information about how the liability was measured;
 Information about modifications in share-based arrangement, if any;
 For Group-settled share-based plan - whether expense is based on reasonable allocation and basis
for allocation;
 Financial effect of share-based plans, including expense and liabilities arising thereof.

Section 21 – Impairment of Assets

General principles
If the recoverable amount of an asset is less than its carrying amount, impairment loss be recognized to
reduce the carrying amount of the asset to its recoverable amount.

Measuring recoverable amount

The recoverable amount of an asset or a cash-generating unit is the higher of its fair value less costs to sell
and its value in use.

Fair value less costs to sell is the amount obtainable from the sale of an asset in an arm’s length
transaction between knowledgeable, willing parties, less the costs of disposal.
Value in use is the present value of the future cash flows expected to be derived from an asset (or
cash- generating unit).

Recognition of impairment loss

An entity shall recognize an impairment loss immediately in profit or loss.
Disclosures
Amount of impairment loss recognized in profit or loss during the period and the line item in the statement
of income in which the impairment loss is included for each asset that was tested for impairment.

Section 22 – Employee Benefits

Measurement (post-employment benefit plan)

Accrual method in calculating benefit obligations in accordance to RA7641 or company policy (if superior
than RA7641). No consideration of changes in future salary rates and service periods

No recognition of actuarial gains/losses.

Disclosures (post-employment benefit plan)

Amount recognized in profit or loss as an expense for post-employment benefit plans, the amount of
its obligation, and the extent of funding at the reporting date.

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 Section 23 – Income Tax

Recognition
Policy choice to account for income taxes using either
a) The taxes payable method, in which an entity shall recognize a current tax liability for tax payable on
taxable profit for the current and past periods
b) The deferred income taxes method, in which, the current and future tax consequences of transactions
and other events are recognized.

Measurement of deferred tax

Deferred tax assets/liabilities are measured using the tax rates and laws that have been enacted or
substantively enacted by the reporting date.

An entity shall not discount deferred tax assets and liabilities

The carrying amount of a deferred tax asset shall be reviewed at the end of each reporting period. An
entity shall reduce the carrying amount of a deferred tax asset to the extent that it is no longer probable
that sufficient taxable profit will be available.

Presentation
Tax expense (income) are recognized n profit or loss or equity as the transaction or other event that
resulted in the tax expense (income)

Current/non-current distinction
Deferred tax assets (liabilities) should be classified as as non-current assets (liabilities).

Disclosures
Disclosure requirements applicable for current taxes payable and deferred income tax method are
enumerated in paragraph 425 to 428.

Section 24 – Foreign Currency Translation

Reporting foreign currency transactions in the functional currency

An entity shall recognize, in profit or loss in the period in which they arise:
 exchange differences arising on the settlement of monetary items; or
 on translating monetary items at closing rates

Presentation currency
An entity shall translate its items of income and expense and financial position into the presentation currency

Disclosures
The amount of an exchange gain or loss included in net income should be disclosed

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 Section 25 – Events After the End of the Reporting Period

 Adjust financial statements to reflect adjusting events – events after the balance sheet date that
provide further evidence of conditions that existed at the end of the reporting period.
 Do not adjust for non-adjusting events – events or conditions that arose after the end of the reporting
period. For these, the entity must disclose the nature of event and an estimate of its financial effect.
 If an entity declares dividends after the reporting period, the entity shall not recognise those dividends
as a liability at the end of the reporting period. That is a non-adjusting event.

Section 26 – Related Party Disclosures

 Disclose parent-subsidiary relationships, including the name of the parent and (if any) the ultimate
controlling party.
 Disclose key management personnel compensation in total for all key management.
 Disclose the following for transactions between related parties:
o Nature of the relationship
o Information about the transactions and outstanding balances necessary to understand the
potential impact on the financial statements
o Amount of the transaction
o Provisions for uncollectible receivables
o Any expense recognised during the period in respect of an amount owed by a related party
 An entity shall make the disclosures required by paragraph 453 separately for each of the
following categories:
a) entities with control, joint control or significant influence over the entity;
b) entities over which the entity has control, joint control or significant influence;
c) key management personnel of the entity or its parent (in the aggregate); and
d) other related parties.

Section 27 – Biological Assets

Recognition
An entity shall recognize a biological asset or agricultural produce when, and only when:
(a) the entity controls the asset as a result of past events;
(b) it is probable that future economic benefits associated with the asset will flow to the entity; and
(c) the fair value or cost of the asset can be measured reliably without undue cost or effort.

Measurement
Policy choice:
(a) Cost model
(b) Current market price model (current market price or the probable selling price)

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 Disclosures

Cost model
 a description of each class of its biological assets
 the depreciation method used
 the useful lives or the depreciation rates used.
 the gross carrying amount and the accumulated depreciation at the beginning and end of the period.

Current market price model

 a description of each class of its biological assets.
 the methods and significant assumptions applied in determining the current market price
 a reconciliation of changes in the carrying amount of biological assets

Section 28 – Government Grants

Recognition and classification

Distinguishes between monetary and non-monetary grants

Accounting policy option for non-monetary grants:

 no recognition; or
 at fair value

Disclosures
Monetary grants
 the nature and amounts of government grants
 unfulfilled conditions and other contingencies attaching to grants

Non-monetary grants
 nature of the government grant and any unfulfilled conditions or contingencies
 where fair value measurement is elected or fair value is voluntarily disclosed, valuation hierarchy
must be applied and the financial statements must describe how fair values were derived.

Section 29 – Transition to the Framework

 Apply PFRS for Small Entities to all recognized assets and liabilities for current and comparative
period (restatement is required).
 Disclosure requirements include:
 a description of the nature of each account affected with the change in accounting policy
 reconciliations of its equity and profit or loss (previous framework vs. PFRS for Small Entities)
 Effective January 1, 2019, with early adoption permitted.

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